The SFR Show

In this Episode Emil, Tom & Michael cut through the noise and explain how to calculate cash flow properly. 

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Transcript

Emil:

Hey everyone, welcome back for this week's episode of The Remote Real Estate Investor. My name is Emil Shour. And I'm joined by my co host,

Tom:

Tom Schneider.

Michael:

Michael Albaum.

Emil:

And today we're going to be talking about how should you actually calculate cash flow. There's a lot of different formulas out there. And we want to clear the air and give you a we believe is the best way to calculate what your projected cash flow should be as you're analyzing a property. So let's get into this episode.

Theme Song

Emil:

Alright, guys, so this was actually a topic that I thought would be interesting to cover, because I feel like there's a lot of misinformation out there. And I feel like it's really easy to read case studies and blogs and go on YouTube or on social media. And you'll see people talking about their cash flow. And the numbers seem outrageous, right? It's like a property renting for 1100 dollars. And they're talking about $400 of cash flow a month. And obviously, it seems like there's a lot of things missing from the way their, their expected cash flow should actually look like. And so I thought it'd be good for us to dive into this on this episode. Have you guys seen the same thing? Like a lot of people?

Michael:

Yeah, I have a property that rents for 1100 cash flows 400 bucks a month, so this is gonna be interesting.

Emil:

Oh, do you

Michael:

No just kidding.

Emil:

Do you guys see this a lot? Do you guys like get this kind of feeling like being prevalent out there that a lot of people maybe aren't calculating cash flow the right way?

Tom:

Or they just inflate it a little bit to feel good about yourself.

Emil:

Sound cool?

Michael:

Yeah, he's a bit of an ego thing.

Tom:

Yeah, the thing with returns and what I like about this episode is man assumptions are just so important. And two people can be looking at the same deal, analyzing it and come up with completely different returns based on the way that they're calculating these, you know, what's in the sausage factory of those calculations is just so critical.

Emil:

Yep.

Michael:

I agree. I think that's kind of where deals often get made or broken is in the assumptions. And if you make a bad assumption, you can very easily buy a bad deal. And you could just as easily lose out on a good deal. So getting good at making assumptions is huge. But I totally see this regularly, where people aren't including the things that I would include in their cash flow calculation to determine what it is, I think it's it's too often to light.

Emil:

Yeah, I agree. I've actually seen examples of this of properties that I've analyzed, like someone posted on Twitter, a property they just purchased. And I remember that exact property, and I had underwrote it as well. And my cash on cash was like half of what, you know, they said their cash on cash was going to be so I've seen it on like, on property, like specific properties, I've underwritten, too. So hopefully, it's a good episode for people to just have like a little bit more of like realistic expectations of what their cash flow could look like after they really account for everything and peanut butter spread all the expenses that come up throughout the year, right, Tom?

Tom:

Jiffy, that Oh, yeah.

Michael:

Jiffy on the spot?

Emil:

All right, let's start out by talking about like, what is the formula? What expenses should you be considering as you're calculating this number?

Michael:

The PITI is an acronym for your principal, interest, taxes and insurance. So the principal and interest is just determined by whatever the mortgage looks like, whatever the interest rate, whatever the amortization period is, and then your property taxes, if you are escrowing, these, the lender will often pay them for you. And so you pay monthly into this account. And you don't have to have this big property tax bill once or twice a year. And so I would always call the county assessor to determine what the after sale property tax looks like for an investor, and then obviously, divide that number by 12, to get a monthly cash flow amount.

And then your insurance, I use a very ballpark estimate of point eight 1.2% of the purchase price for properties under 150 K. And for properties over 150 K, you're probably looking closer to one half - .8% of the purchase price, one half percent to .8% of the purchase price. And so I'll use that number divided by 12. And again, apply that to my monthly cash flow. So you've got your principal interest, taxes and insurance, and then your property management on top of that, Tom, what are some other expenses that I want to hog the mic here that you would include in your monthly cash flow?

Tom:

Ohh, vacancy, so an often assumption used is half of a percent of the annual rent or perhaps a month, depending on what that term time is, like, like a more conservative would be doing it a month, but hopefully that would be shorter than that. Another one is within that property management fee, or I guess this would be separate but they would be managing that process. If you're using professional property management would be turned costs would be repairs and maintenance costs and to define the term cost. That's the cost You're paying after your tenant moves out, and you have to get the property rent ready again. So that's typically more static stuff, some paints and carpet, perhaps if there's some older deferred maintenance that was there when the tenant was living there that kicked down a line that would be addressing any of those issues. So turn costs, what do you typically budget for your? I'd love to hear what you guys typically budget around turn costs.

Michael:

1 million dollars. I've seen this inverse relationship between monthly rent, amount of the property and turn costs. So if I've got a $2500 a month rental, my turn reserved that I'm escrowing is going to be a lot less than a $500 a month apartment. So can I have a bigger security?

Emil:

Do you guys have a separate turn reserve? Yes, don't just leave it as a repair and maintenance and it kind of just gets lumped in there.

Michael:

I mean, it can, I just am mentally bucketing money for when the turn comes, that's totally independent of the regular repair and maintenance and the regular capex that I'm anticipating and also reserving for a page back the roof, exterior paint that kind of stuff.

Tom:

You have a mental escrow account.

Michael:

Yeah, mental escrow account, but also I put it into my calculator, it is a separate line item. But yeah, mentally, I'm thinking about like, Okay, this money is going towards the eventual turn inevitable term for kind of middle of the road rental, I put a couple hundred bucks. Yeah, on it, depending on when the last time that the unit was turned. If you did a big turn at the beginning, your subsequent turns are probably going to be a lot less. And you can also do things on the front end, like tenant proof properties, put in vinyl flooring, laminate flooring, as opposed to carpet, you never have to worry about that, again, you know, maybe tougher cabinets, builder grade cabinets, you can put into the getting into get less banged up. So there are things you can do on the front end to make your turn reserves down the road, your turns less expensive.

Tom:

I’m going through a turn right now on one of the properties. And thankfully, the property manager which just did their move out inspection in the properties in great shape. So this is going to be a fairly inexpensive turn, it's like 400 bucks or something like that just to do kind of a deep cleaning. But in my experience, turn costs have ranged anywhere from 400 to like 10,000 bucks if there's a lot of deferred maintenance. And where you see those big deferred maintenance is oftentimes if you have a tenant that's been living in the property for a super long time, then stuff builds up over time. Sneaky stuff sneaks up like fences and any kind of like loose decks and stuff like that is the one that always surprised me that I'm like, dang, that's expensive. So in budgeting, kind of depending on the condition of the home, my kind of down the middle of the line, say we're talking about a 1700 square foot three bedroom, two bath, I typically budget around 2000 bucks or something like that for the turn if it's occupied. And it's, you know, been so for 12 months.

Michael:

Wow. $2,000 you budget for the return? I mean, for the for the turn,

Tom:

I'd say anywhere between 1000 and 2000 bucks. I mean, I don't know you don't necessarily and be overly cautious, but then optimistic.

Emil:

So how, at this point, how are you even making any money on these with all those assumptions? I'm kidding, we don't have to get into that. But I think the only other one we're missing is utilities. So if you're buying a single family home, most of the time, water and electric are going to be even lawn service, all that stuff is going to be covered by the tenant. So you don't have a ton of utilities to pay for. If you're buying multifamily. A lot of times you as the owner, you're on the hook for water heat, sometimes depending on where you're buying a couple other different things. So I've noticed with multifamily, you have to account for a lot more utility versus single family, the tenant is covering a lot of those.

Michael:

And also depending on how the property is metered, you may not be able to push utilities onto the tenant for multifamily and a lot of multifamily also have what's called a house meter, which is a common area usually just electric meter. That's good for common area lights, exterior lights, that kind of thing. So you'll as the owner will likely be responsible for that. Let's say again, just check how the property is metered. And that'll give you some indication of whether or not you as the owner are going to be paying utilities whether or not you're going to submeter it or check some of that expense back to the tenants in the form of a utility bill back or just included on the rent. Again, check how it's metered.

Emil:

Yep. So okay, so I think those are all the different line items It was interesting to do because you guys have a couple more line items than I do so that may be some homework for me to start being a little more conservative. I thought I was being conservative here I am looking at you guys like dang

Tom:

Looking back at my bottle I I estimate typically like 1000 bucks not 2000 bucks in that like catbacks turn costs but a lot of that is dependent on what I'm seeing like within the inspection if it's like in pretty good shape your point to Tom How do you ever cash flow on your on your property with that turning cost is is right and so yes, a little bit less overzealous with my Yeah, not 2000 roughly you know 750 to 1000 bucks is is more where I target that turn costs the once a tenant moves out. So within that cash flow assumptions,

Michael:

And is that inclusive of like cap x reserves to for HVAC roof? Or is that a separate line item?

Tom

Two separate line items. So one of them would be for R&M for costs that I'm incurring? Well, the tenant is in the property. So roughly 75 bucks a month, maybe 100 bucks a month, and hopefully a lot of the months that doesn't happen, and you don't do that, but then a separate line item for reserve for capital expenditures.

Michael:

And so is your turn reserve considered cap x?

Tom:

Yes, that is that. Am I thinking about this the same way that you are? What? Go ahead, Michael.

Michael:

Yeah, I mean, I just have a separate, I break it out, separate I call it, you know, turn reserve versus capex. My turn reserve I expect to spend every year or every tenant turn versus the cap x is more, I think 10. Instead of that a little going into this bucket, that's going to be a piggy bank to draw on when I need to replace the roof replace the fat. But at the end of the day, I mean, the money is going into the account anyhow. So I just mentally earmark it for certain purposes.

Tom:

I like it. So just to paraphrase the three buckets that you have within these type of costs is R&M tenant occupied, right. Yeah. And then one would be turned costs just bread and butter, cleaning paint. And then the third one would be more specific for like, roof or like, you know, major property system? Ah, back. Yeah,

Michael:

Big ticket systems.Yeah, exactly.

Tom:

I like it. Nice. Nice.

Emil:

You got a lot of very detailed Michael, I like it.

Michael:

I'm a reformed engineer. I don't have a choice.

Emil:

All right. So we've gone over, like, what's the formula world of things we consider, we've kind of like sprinkled in some of our assumptions, but maybe we should just go through each line item and give what we think maybe are some good assumptions for people. Would that be helpful?

Michael:

Totally. Let's do it.

Emil:

Okay. All right. So mortgage, I don't think we need to get into how you can go online, use a mortgage calculator, figure out your mortgage payment. That one's pretty, pretty simple. Insurance. Michael, I really liked your, your kind of formula, I use something pretty close. Can you describe that again?

Michael:

Yeah, so I like to use and this holds fairly true for properties. 150,000 purchase price or less. So I like using point eight to 1.2% of the purchase price. So let's just take an example a property's 100,000. on the low end, we're talking $800 a year on the high end, probably around 1200. And what's going to make the difference on that sliding scale is one, how conservative how much insurance? Are you looking to get? What type of policies that are replacement cost versus actual cash value? Is it really a comprehensive policy? Or is it named peril? So I am a very conservative person, I come from the insurance industry, I grew up in the insurance industry, so I get a more expensive policy than is available for that same hundred thousand dollar property, you know, my guess is you could go get insurance for 400 500 bucks annually, it is available is out there.

But it's probably not going to be the type of coverage that I'm comfortable with. And so to help me sleep at night, I'm going to up the coverages, I'm going to add some additional layers to it probably get some additional liability coverage. And so the additional coverages just have additional cost. So for the extra $300 a year, or $600, or whatever it is, that's often worth it to me. So I've just over the years and purchasing properties and helping other people purchase properties, that point eight to 1.2% of the purchase price tends to be fairly reasonable. And I'm confident that getting that type of coverage, you shouldn't be paying much more than that, that's going to be on the high end, being very conservative.

So if that ends up being your biggest expense on the property, you know, of course, we might want to go back and take a second look at things and say, oh, maybe we were too conservative. But I find that typically the $300 that we might be too overly conservative isn't going to push something from a no go into a go category. There are typically going to be other expenses that are significantly larger as a percentage of the income that we want to take a second look at and see if we can't refine those a little bit more. So that was a super long winded rant. Hope that answers the question Emil.

Emil:

No, that was good. That was great. Okay, so that's insurance. Tom, anything you want to add there anything you kind of like to use for an assumption that's made different from what Michael mentioned,

Tom

If you look at the Roofstock calculator, really helpful tool, you log in to Roofstock and look at an individual listing. And then you click on financials. Just below that financials tab, you can click on cashflow, you can see kind of a rundown of all these different costs. The Roofstock calculator is pretty handy in that you can see all these assumptions. One thing I like about Michael's example for insurance is he does it as a percentage of the purchase price. It's just kind of general guidance. And a lot of values in the risk calculator does it a percentage of income. So I think in some cases, a percentage of income makes sense. And in some cases, a percentage of the value makes sense. So just as kind of like an FYI, you can see these assumptions in here and looking at a property that's $110,000 we can see this insurance value is pretty close to Michael's assumption of point zero Point 8% point oh 8%.

Michael:

Yeah, yeah,

Tom

Where that would be $800. This example is a little bit less than that at $110,000. Home is around $600. But within rootstocks calculation for insurance, they'll actually get a value that a insurance company will, will bind again. So part of the Roofstock’s operations team, they'll go out and work with one of our insurance partners, insurance costs can change based on what kind of deductible you have. So depending on what value you have, it could either the price go up or down. But that's my two cents is I'll just touch on Roofstock as a platform and their calculator, the value they have and where it comes from.

Emil:

Cool. So next one is property tax. I don't think you should estimate anything for this one, I think Michael mentioned called the property assessor, some cities, they have a like part of their website, you can literally just go put in the value that you're going to be buying at you and put in the address, and it'll spit out what the new property tax will be. So this one's probably no one you kind of estimate based on percentages or whatever. This is something, it varies from state to state, city to city, you should probably just go figure out what it is for your market. So you can accurately estimate it.

Tom:

There's a lot of landmines and trying to calculate property taxes, one of them being if you're looking at last year's taxes, the current owner might be an owner occupied, so they get a homeowner's exemption. So I would be conservative in that property tax assumption.

Emil:

Cool. Alright, so next one is property management, property management. This one's usually pretty easy to figure out, you know, as you're interviewing different property managers, you find out what their property management fee is, whether it's flat fee or percentage of monthly rents, like Tom and Michael were talking about, and this isn't something I should I do but I should be doing in that property management or you can have it as a different line item, adding it make sure you add in whatever you think for lease or releasing fee, right, so releasing fee will usually be a smaller percentage than a completely new lease, but factoring in every year that the property manager is going to charge either a release fee or if it's a new tenant, a leasing fee. So adding that up there, Tom, you want to add something

Tom:

Yeah, just specific to roof stocks calculator that it has or any calculator that you're building perhaps in Excel with rootstocks calculator, It defaults at 8%, I remember something that we wanted to do on the product side was make it like updated dynamically based on picking a property manager if you use one of Rootstock’s preferred property managers to automatically update, but whatever the case is, when you know what that property manager fee is going to be for rent collection, you should update your calculator accordingly, within rootstocks calculator, it defaulted. 8%, but you should keep that updated.

Emil:

All right, give me on. Okay, so after property management, we have utilities. And so for utilities for anything, two units, plus, I use $1,000 per year per unit. So if I'm looking at, let's say, a four unit building, and I want to figure it out monthly, it's just $1,000 times forums 4000, divided by 12, to find the monthly for single family, I don't have a more cookie cutter approach. Again, it's it's a lot of the times utilities are going to be covered by the tenant. But sometimes depending on some cities, like I own a property in St. Louis, a single family home in St. Louis, the water bill and the sewer bill are separate. Whereas most other cities, it's all on one bill. And so the tenant pays the water bill. But the sewer bill comes to me as the owner. So that's something I have to factor in as part of my utilities. Are you guys any kind of formula you use to estimate utilities?

Tom:

I think on every lease that I have the tenant pays for utilities, I don't even have that in my, in my model, I guess it's more common with multifamily and bigger stuff. But utility isn't even something that we'll have. Perhaps during the turn, you know, I might spend like $10, or whatnot, just during the turn time where the utilities will be on me as the landlord, but for the most part, yeah, I don't consider that. In my cash flow.

Michael:

I was gonna say for me for multifamily, it's, it's similar, I think 1000 bucks a year per unit is fairly reasonable, depending on what utilities are being paid by the owner. And usually the listing will say on or paid heat, water or whatever. And that can give get pretty good insight into all tenant paid utilities. Okay, that's gonna be a whole lot less than a grand a unit a year,

Emil:

Like 12 months of expense, prior expenses from the seller. And so you can kind of see like, how much are they paying for all these different expenses and see if it lines up with what you have and if you need to adjust up or down but as I have no information, I just put $1,000 a year per unit.

Michael:

Yeah. And I would say don't hope that you get those t twelves. Go demand those in the due diligence. I would say that's something that you really need to get a handle on before you close the property because you could find out that you were way off on your estimate and really buy yourself an alligator.

Emil:

As our good friend Michael Zuber likes to call it absolutely. Next one is repair and maintenance and capex some people separate those out. Most people separate them out. I have them as one line item now and for multifamily, I'm using hundred dollars a month per unit is what I do for repair, maintenance and capex just kind of all together. for single family I've usually used 120 550 per month on single family is the amount I've used for repair and maintenance and capex as one line item. How about you guys?

Michael:

like Tom for my repair and maintenance, I break it out into those three that we talked about. So for repair and maintenance, I'll use 75 $200 a month depending on the property size, and location and tenant class. So in a milder climate with a good tenant, that's not a massive property, I'll use 75 bucks a month, all the way up to the size of 100 bucks a month. And then for capex, I really let the inspection report dictate what that looks like. So if you've got that in advance, like on a roof stock property, you can get a decent handle on what that might look like. versus just looking at the photos or plugging something in for a run of the mill single family home that seems to be in decent shape 750 bucks a year, between 750 to 1000 bucks a year for capex usually should do it, that's, you know, in three years time, you'll have 2000 plus dollars set aside.

And also, depending on if I'm going to get a home warranty or not, for that property is going to also determine what type of capex budget I'm looking at. And capex is kind of one of those tough ones too, because it's a bit of a living, breathing, moving target. If I just replaced the H fac this year, well, now I'm going to put less money set aside for that each of that going forward because I know I got another 10 to 15 years out of it. So depending on the life of the systems, I call it the property will dictate what that budget what that number should be.

Tom:

Ditto to Michael and I like that concept of kind of trade off, you know, you might not what you might be spending more on one year on the turn or or catbacks you know, major property systems that's going to take away for future costs related to to R&M. So similar to Michael and structuring that and if you really wanted to geek out and get really sophisticated on building a crystal ball to estimate some variables that we used when I was working on one of the REIT the vintage of the property was the size of the property just because oftentimes these costs, especially on the turn are directly related to how big the property is and square footage, and perhaps certain vintage, you might expect more or less on those turn costs. Those are some important variables to consider.

Michael:

The one thing I would say on vintage is just look to find out what's been done on the property. I've got a 4-Plex that was built in like 1892. And we did a total gut rehab on it down to the studs, we put in brand new electrical brand new plumbing, brand new roof. I mean, everything is brand new. So the year of construction is at 92. So if someone attacks record, that's what they would see. But as far as the insurance is concerned, the effective year of construction in 2019. So I would say you know, with a take it with a grain of salt look just a little bit beyond the year of construction to determine Okay, what was done? Absolutely, if something was built in the 50s it's going to have more maintenance and something that was built in 2000s. But if that 1950s has all new electrical plumbing, I would say they might be comparable or that might could even be more updated.

Tom:

before we run out of time. I'd love to hear your guys's thoughts, more multifamily dudes on like in ciliary and silivri income like perhaps having a laundry machine or having like storage sales. How do you guys underwrite that when you're thinking about cash flow on your multifamily? Because there's also the costs of like up keeping those type of amenities?

Michael:

Absolutely. So for me, I'll just jump in here Emil for I gotta hop off. It's something that I think about, and we'll calculate if it's like a reasonable assumption. And so for me, I just have laundry, the vast majority of multifamily on site coin laundry, it's not a big moneymaker by any means. I mean, 15 to 20 bucks a month, maybe. But there's cost associated. so there's costs associated with that T rex and paying the water and electric bill for those machines because those are on house meters. So the big ones that I like that I use is storage, digital storage or parking. I know pretty darn sure what I can get for those on a monthly basis is for rent comps talking to property managers and also it has zero expense. So those are ones that I really like adding into the pro forma or using to drive value and increase the NOI.

Emil:

For me I am newer to multifamily so I don't have like the confidence Michael does and knowing Okay, we have a garage we have some spaces how much we can get for it. So I don't even account for any of that and laundry. Even if you have a bigger building maybe you account for it, but I haven't been when I'm looking at stuff I just those to me are are extras, but I haven't really been accounting for those is that extra income because like Michael mentioned, they do come with some extra expense as well. So unless it's parking, parking and storage, that's that's on the property, but laundry, it's you know, you're paying for that as a landlord potentially. Okay, so you guys had mentioned turn that you guys actually have it as a separate line item. I think we already were to talk about kind of what you guys set aside for that. So Tom, you mentioned like $1,000 every year every other year, how do you set that term budget aside?

Tom:

Yeah, I would set it as an annual You will amount 750 to 1000 bucks. And again, if the property's been occupied for a long period of time, I would expect that eventually be a little bit north of that value. But you know, be happily surprised when you get back in your turn cost is 400 bucks, 300 bucks, and that that you can roll around in that extra money.

Emil:

Yeah. And you know, it also, I think it depends on property type, right, with multifamily, you're just gonna typically see higher turnover. So you're gonna have more turns where a single family I don't know about you, Tom. But like, single family, a lot of my tenants stay really long term like I've had of the four single family homes I've owned over the last couple years, I've had one turn, the rest of them have stayed even with rent increases, like single family tenants just seem to stay a lot longer.

Tom:

I totally agree. I mean, I was saying I had a turn right now, but it's like, it's pretty far and few between. I think you're right, though. And there are studies around SFR having longer duration. And it makes sense. I don't modify my cash flow assumptions. I'll still assume you know, based on whatever is on the lease like expect, the worse that they're going to move out. But generally speaking, like you said, oftentimes be surprised. happily surprised. Roll around that extra dough.

Emil:

Awesome. All right. So then the last one, I think we should cover here that we mentioned in the different expenses, you should be considering his vacancy. What's funny is for single family, I always do 5%. I feel like that's like the industry standard. But again, if I'm looking at my actual vacancy across my portfolio, it is way below that I think it's just good to be conservative, because I don't know, maybe you're in a city or an area where your tenant does leave once a year, whatever that may be. And it kind of equates to 5%. But honestly, I've heard so many people who have seen my family and they're like, you know, they're good landlords, they have the same tenants for five to 10 years. So your vacancy becomes real tiny.

Tom

Especially Emil, I think if you are getting in really nice school districts, it's a hassle. Like if you have a rental in a nice school district, and you have good tenants with kids, like no reason to move out, you know, I think it's an upside to including that in your acquisition strategy a little bit.

Emil:

Totally. So that 5% for single family for multifamily, I do seven and a half 8%, usually just depending on where I'm investing in. But I feel like that's a solid level, like seven and a half percent. A lot of these things also, especially as you're learning a new market, every market I think is different. And you're estimating these expenses, but I imagine in five to 10 years, I'm going to be much better at like being able to look back at all my expenses for five years and say, Okay, here's what it actually averaged out to be. And here's how my pro forma should change. So you know, I think right now, it's like, especially in the early goings, you're kind of just taking some different assumptions, either talking to people who are in that market, or figuring it out. And then I think over time, you're just gonna get really good at knowing, alright, my expenses are basically this amount every single year per unit. This is my vacancy over the last five years. So I think, just with time, you'll get really, really good at these pro forma. Yeah,

Tom:

Yeah. And when you're setting that budget, and thinking about your cash flow, that's goal setting, right? And to be successful, and to make money as a real estate investor is to, you know, spend less and make more. And once you identify those numbers, those are specific values that you're working against. So when you get to the end of the year, it's like, Okay, how do we do against these values, and hopefully beat them. And if you don't, you know, reasons why and how to improve upon it. And if you don't beat those value goals, hopefully you put enough of a cushion, that you can still be fine. And then get back at it next year and work with your property manager if you're working with a property manager. So it's fun.

One other line item for you Emil is HOA fees. So if you're buying a property, and there's a homeowner's association fee, and those can be super high in some areas, especially if you're buying like condos, or they can be really, really low. So that's a really important consideration because that's money in money out.

Emil:

Yeah. And like you mentioned, some of them are high and some of them are low. Like I have one property, I only have one property that's in an HOA, and it's $21 a month so as I was looking at it, everything else I really didn't want a property with an HOA but at $21 it wasn't really affecting my monthly cash flow. And so yeah, I went with that. But yeah, be careful sometimes it can be $100 plus, so that can really really you know, mess with your cash flow number. So good call Tom.

Tom:

And kind of back to that exercise of comparing your pro forma assumptions for cash flow to actual you have some actions that you can do to try to improve them specifically around shopping. for insurance costs, that's something that I need to do right now, to revamp the insurance costs, looking at mortgage rates, interest rates have never been lower. So you can beat those values. And then looking at that trade off between taking care of items on the turn or just repair replace. So there's a lot of places that you as an investor, in working with your property manager and some of your other partners that you have, there's actionable item, actionable items to improve on those values.

Emil:

Yep. You know, there's other small things, right? Like if you are again, buying, let's say, a four unit building, and you're on the hook for water, installing low flow toilets, right, not expensive, but over the course of a year, it can add up to some decent savings that probably more than paid for the toilet in the first year. So like there's, you know, little things you can do to also try to decrease your expenses along the way.

Tom:

Yeah. And rent growth versus vacancy. You know,

Emil:

There you go.

Tom:

Have we done a debate on that rent growth versus vacancy?

Emil:

We haven't we should

Tom:

That's coming up in the pipeline, for sure.

Emil:

Yeah.

Tom:

I like the question of you know, do you are raising rates at the risks of vacancy? Right, I got a feeling I think I know where we're gonna land. But it'll be fun to just switch back and forth in that debate.

Emil:

Yeah. I also think it's depending on what you invest in, I think dictates how you do it. Right? If you're investing in something that's valued on cap rate makes a lot more sense. Because it's all based on income versus a home or up to four units based on sales comps. You know, you're less incentivized

Tom:

Very astute point, Emil makes a lot of sense.

Emil:

But we can get into all that in a debate.

Tom:

Yeah, it'll be a good episode.

Emil:

With that. I think it's probably a good spot for us and this episode. Thank you again, everyone for lending us your ears, and we will check you out in next week's episode. Happy investing.

Tom:

Happy investing.

In this episode we get Roofstock and Streetlane's VP of Construction, Jim Barker's take on what investors should keep an eye out for on inspection reports, and what to consider that might not be on it.  

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. In today's weekend wisdom, we have Jim Barker. Jim is a seasoned professional in the single family space. He is the VP of construction at Streetlane and Roofstock and has seen thousands the homes. And the question we asked for him today is what are some key parts of the inspection contingency that he looks at?

Theme Song

Jim:

Yeah, I know it's a it's a great question. And we're buying houses every week for institutional clients and bought thousands of houses for various owners over the last few years. And these are always things that come up is when you get an inspection report back -- what to worry about and what is fixable. Because there's things that you want to avoid that that are or maybe you know, functional obsolescence or something that is really foundational to the home that that is going to be a long term problem. And that those are the things that I really look for when I am going through an inspection report. And then there's things that are just either aesthetics or basic functional that they have a dollar amount next to them for a repair, replace, but as long as you understand that, it's still a good asset, and those things are easily fixed.

So that's kind of how I divide up the inspection reports. When I go through them, I really look for any sort of long term functional issues like structural cracks, I really try to avoid poor drainage, and that may cause water damage. And another thing with basements that we see quite a bit of is, you get a 50 year flood, or 100 year flood, which I use that term, but how come it always seems like this, these flood events happen so much more often than 50 or 100 years. And if you're a property owner, it always seems to happen while you own it. So I'm very leery about drainage, especially in homes with basements and want to make sure that it's not sitting on a downhill slope or that the gutters are properly diverting water away. But you know, other things like does the home have insulation in the attic? Or that that's something that you don’t really think about, but it really impacts the livability of that home.

And the things that everybody always wants to look at, or like old HVAC the water heater, and it's good. But those are simple fixes. I mean, it's $1 amount, but once you swap it out for new equipment, you don't worry about it again for the lifespan of that equipment. So I guess that's it really for me is I want to focus on things that are not easily fixed and structural water damage, strange layout of rooms and things that may not show up on the inspection report the neighborhood issues, right? That's a as somebody who's doing their due diligence, not just to look at the asset, but really look at, you know, the immediate surrounding neighborhood.

Emil:

I like that. I like that you frame that. An old age back and all the water heater, they're really not big deals because a first time investor, they'll see that. And I think like the warning signs go off. And you're right. It's just it's $1 amount. It's not that complicated. Someone can change it out in a day. Like it's not a long term issue. It's just going to cost them money to fix.

Jim:

Yeah, no, it's the things that where you really have to rip into the structure or that I don't like to deal with it. If I'm not an experienced construction professional or have a contractor that I really trust, it's just tough to. You'll even fix some of those issues, and you're never quite sure if you really got them or like you said on the water heater, once you change it out, it's done. I would say it probably should touch on it though. Something that we've seen pretty regularly in the portfolios that we manage to is older plumbing systems seems to be one that's coming up regularly. And there's a lot of homes that are popular for SFR investors, but they're built maybe 40 or 50 years ago and that there's a series of items in homes that are really what I'll call like lifetime replacements and things like a driveway the supply plumbing so you really have copper plumbing from so a lot of these older houses, and then the drain line plumbing sewer lateral to the house.

And these things last 50 years. I mean, they're things that you don't ever think about replacing and a lot of times don't show up on an inspection report because they're your underground or within walls. But it's a good question to ask the inspector especially if you can have them focus on a few things is to give their evaluation of what are the materials that are they're used for supply plumbing, the waist plumbing, and give some evaluation of the driveway and other any of the other lifetime type replacement items as we see it right after 50 years. They do give out there are things that you may need to address and they tend to be a little bit more pricey when you have to take care of those things. They're not showstoppers, but you should definitely know about them. When getting your home inspected

Tom:

Thanks, Jim and thank you to all of our listeners. If you enjoy the episode enjoyed the podcast, please subscribe and give us a rating and have a great day. Happy investing

In this episode we get Roofstock and Streetlane's VP of Construction, Jim Barker's take on what investors should keep an eye out for on inspection reports, and what to consider that might not be on it.  

---

Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. In today's weekend wisdom, we have Jim Barker. Jim is a seasoned professional in the single family space. He is the VP of construction at Streetlane and Roofstock and has seen thousands the homes. And the question we asked for him today is what are some key parts of the inspection contingency that he looks at?

Theme Song

Jim:

Yeah, I know it's a it's a great question. And we're buying houses every week for institutional clients and bought thousands of houses for various owners over the last few years. And these are always things that come up is when you get an inspection report back -- what to worry about and what is fixable. Because there's things that you want to avoid that that are or maybe you know, functional obsolescence or something that is really foundational to the home that that is going to be a long term problem. And that those are the things that I really look for when I am going through an inspection report. And then there's things that are just either aesthetics or basic functional that they have a dollar amount next to them for a repair, replace, but as long as you understand that, it's still a good asset, and those things are easily fixed.

So that's kind of how I divide up the inspection reports. When I go through them, I really look for any sort of long term functional issues like structural cracks, I really try to avoid poor drainage, and that may cause water damage. And another thing with basements that we see quite a bit of is, you get a 50 year flood, or 100 year flood, which I use that term, but how come it always seems like this, these flood events happen so much more often than 50 or 100 years. And if you're a property owner, it always seems to happen while you own it. So I'm very leery about drainage, especially in homes with basements and want to make sure that it's not sitting on a downhill slope or that the gutters are properly diverting water away. But you know, other things like does the home have insulation in the attic? Or that that's something that you don’t really think about, but it really impacts the livability of that home.

And the things that everybody always wants to look at, or like old HVAC the water heater, and it's good. But those are simple fixes. I mean, it's $1 amount, but once you swap it out for new equipment, you don't worry about it again for the lifespan of that equipment. So I guess that's it really for me is I want to focus on things that are not easily fixed and structural water damage, strange layout of rooms and things that may not show up on the inspection report the neighborhood issues, right? That's a as somebody who's doing their due diligence, not just to look at the asset, but really look at, you know, the immediate surrounding neighborhood.

Emil:

I like that. I like that you frame that. An old age back and all the water heater, they're really not big deals because a first time investor, they'll see that. And I think like the warning signs go off. And you're right. It's just it's $1 amount. It's not that complicated. Someone can change it out in a day. Like it's not a long term issue. It's just going to cost them money to fix.

Jim:

Yeah, no, it's the things that where you really have to rip into the structure or that I don't like to deal with it. If I'm not an experienced construction professional or have a contractor that I really trust, it's just tough to. You'll even fix some of those issues, and you're never quite sure if you really got them or like you said on the water heater, once you change it out, it's done. I would say it probably should touch on it though. Something that we've seen pretty regularly in the portfolios that we manage to is older plumbing systems seems to be one that's coming up regularly. And there's a lot of homes that are popular for SFR investors, but they're built maybe 40 or 50 years ago and that there's a series of items in homes that are really what I'll call like lifetime replacements and things like a driveway the supply plumbing so you really have copper plumbing from so a lot of these older houses, and then the drain line plumbing sewer lateral to the house.

And these things last 50 years. I mean, they're things that you don't ever think about replacing and a lot of times don't show up on an inspection report because they're your underground or within walls. But it's a good question to ask the inspector especially if you can have them focus on a few things is to give their evaluation of what are the materials that are they're used for supply plumbing, the waist plumbing, and give some evaluation of the driveway and other any of the other lifetime type replacement items as we see it right after 50 years. They do give out there are things that you may need to address and they tend to be a little bit more pricey when you have to take care of those things. They're not showstoppers, but you should definitely know about them. When getting your home inspected

Tom:

Thanks, Jim and thank you to all of our listeners. If you enjoy the episode enjoyed the podcast, please subscribe and give us a rating and have a great day. Happy investing

Tom and Michael chat with Dan Nelson from Excalibur Homes about the specifics of the Atlanta Market. 

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On today's episode, we're going to be deep diving in the Atlanta market. And we're here today with Dan Nelson. And I'm also here with

Michael:

Michael Albaum.

Tom:

All right, let's do it.

Tom:

Before we jump into the interview, let's touch on some of the quantitative aspects of the Atlanta market. So this information is coming from the Census Bureau, Macrotrends as well as John Burns. First, I'm going to talk about the population in Atlanta proper, just over 500,000 individuals in the greater MSA population, there is just under 6 million so 5,000,800 and we've seen a population growth of 2%. Over the last year, the median household in Atlanta that's $71,000. The existing home values year over year has increased by 5.5%. And the effective apartment rent has increased by 2.4%.

The home value entry level according to John Burns is at $196,000. The existing median home price is $279,000, then median single family rent is $1,364. And the year over year rent growth of that single family has grown a whopping 5.6%. The single family gross yield is 7.8%. Jumping into a different category. Let's talk about the occupancy rate. So the occupancy rate in Atlanta is 91.3%. The number of unique units properties are artists 2,331,002. And of that the owner occupied mix up 59% of that or 1.367 million, renter occupied and makes up just over 750,760 9000 to be exact, and vacant right now is a little bit under 200,000. And that's at 8%. All right, let's jump into the interview.

Excellent. So before we jump into the Atlanta specifics, Dan, I'd love to hear a little bit about yourself and the company that you work for and all that good stuff.

Dan:

Yeah, my name is Dan Nelson. I'm the VP of Sales with Excalibur homes. I'm a third generation realtor. My grandmother, Mary Nelson was just recently inducted into the DeKalb County Hall of Fame for realtors, which was exciting for the family. My dad, Mike Nelson, the founder of Excalibur started the company back in 1985, he had a primary focus towards property management versus sales looking for a little bit more stability for himself and our family. While he was at the same time simultaneously was in the National Guard, flying helicopters, my brothers and I all grew up within the company. So we started in, you know, Middle School in high school with learning turnkey, and construction and landscaping during the summers as well as once we were old enough to drive taking administrative positions within the company, learning everything from the ground up, essentially how to each department operate, understanding each job and also working each job for a couple years at a time.

I took a brief stint down in Florida, working in the multifamily industry with some with a company out of Tampa called 908. Development, they did a low income tax credit company where they did a high rise in downtown St. Pete. So I handled the lease up and stabilization of that project that was in the 2009 to 2011 timeframe, I had my Florida real estate license down there. While I didn't need it for that job, particularly, I moved back to Atlanta in 2012, I had my Georgia real estate license here. And that was about the time 2011 2012 we started seeing institutional folks and through the Atlanta market, doing things we've never really seen before buying properties on a level that was kind of unheard of in the SFR space, you know, typically they were not really big players and this type of market until then.

So when I came back, it said, Hey, Dad, you know, we're going to go buy a couple hundred houses at a time, you know, not five, not 10. So it's a very exciting time for us to go through and one learn how an institutional level underwriting works, how they're evaluating homes, you know, what they're going to consider capitalize expenses versus what a mom and pop investor might. And the level of buying was very interesting for us to learn how to navigate and compete with some of the larger funds out there at the courthouse steps, essentially, you know, we'd have teams go out on the Tuesday of the month when they were trying loans. And we'd go out there with a big stack of certified checks and hope that we would win as many bids as possible. As well as putting out you know, 50 to 100 offers a day on the MLS trying to capture as many opportunities as possible.

So that, for me was probably the most valuable experience in the shortest amount of time for real estate related to acquiring investment properties for investors. And that experience has translated very well to assisting our mom and pop investors as well as Roofstock customers that are entering Atlanta's market to understand how big of an area we were in and each individual sub market that we're in and how different types of properties are going to perform over a certain period of time. And from there, I got promoted to Vice President of Sales. So now my job entails growing our team, you know, marketing and making sure that we're bringing in more customers assisting customers like yourself, acquiring as many properties and good opportunities, giving good counseling advice as to what type of investment strategy might be best for certain buyers, whether it's, I'm looking for a capital gains type play, or I'm looking for more of a retirement play, whatever it may be, depends on which investors and what stage of their life and what's most important to them.

But we take that into consideration much like you guys do to building a customized buy box for certain buyers. Excalibur as a whole is kind of a full service company, whereas we manage about 2500 homes here in metro Atlanta are one of the larger companies in metro Atlanta, with a pretty large footprint. We're in 12 to 15 counties. We're located here in Alpharetta, Georgia, which is about 30 minutes north of Atlanta itself. And we've been here for 35 years. The property management is what it is we're obviously going to handle properties for owners make sure that we're addressing tenants leases moving in tenants address Seeing work orders to maintain properties etc on call maintenance. But at the same time, we have a sales division that's going to help people acquire and build portfolios or help them exit the market at a certain time.

Tom:

So, Dan, super interesting. Full disclosure, I'm an Excalibur customer, a happy Excalibur customer. But one thing I didn't know was that Excalibur had been in business since 1985. And and you given the background, I thought it was interesting, talking about how, you know, things changed in 2010 2012. All this institutional capital came in, how did all of that change the process, specifically around like evaluation, and then any other changes with management and what kind of changes that that look like?

Dan:

On the acquisition side, it definitely sped up our timeframe. So whereas traditionally, you would go out, take a client to a house, walk through it, you know, determine exactly what your plan is, prior to making an offer. We're now sending out sight unseen offers and making our best judgment on renovation budgets based on our experience and how much renovation we do, and we're doing, you know, millions of dollars in turnkeys, and large renovations, as well as new constructions, we have a very good pulse on what's happening in the construction side of the market, which is very beneficial to our clients. The timing of it is you've probably seen this before, when you're trying to acquire a home, there's a lot of people trying to acquire homes. So from last year to this year, in September last year, we had roughly 20,000 active listings

This year, we're down about 48% in the month of September for 2020. So obviously, the demand keeps increasing supply has been going down, which makes it more competitive for us to get properties under contract. So our technique is putting out offers with our best judgment on what the property value in its current condition in estimating what a renovation is going to cost us on the front end, so that we can get that property under contract before they see 1520 other offers from other investors and owner occupants that are still competing in this price point. And then from there, we'll go out there and one of the main selling points on Excalibur is we're able to go out there and you know, one to two days with the construction team and say it's exactly $12,000, or it's exactly $5,000. So if we were off on our initial judgment, we know within a matter of days that we can renegotiate this deal, or we found something that gives us the opportunity to pull out because it's too significant for us to one be able to renegotiate with the seller or to it's beyond the comfort level of another investor and something they might be willing to spend for a renovation.

So that's one of the main things is the speed of which the transactions are happening right now and the competitiveness of the market. So I think it's it's no secret that Atlanta has been a good opportunity for people nationwide and worldwide. So once institutional guys got here that created a level of competition we weren't ready for and we got used to. And now we're kind of changing with the times on a monthly basis instead of a yearly basis.

Michael:

Dan, kind of in that same vein is more of a strategy question. Are you the offers that you're writing? Are you giving them an expiration date of 24 hours or 48 hours that the seller is forced to give you a response? Because in some markets, like especially in California, it's so hot, it's so competitive, you want to give the seller a deadline so that they're not looking at other offers, but also want to be flexible enough so that they consider your offer, as opposed to they know they're getting 10-12-15 other offers? How do you play that?

Dan:

The short answer is yes, in most cases, we're going to give them an expiration of 24 hours from the time of delivery. The long answer is it's a case by case scenario. So if we can get a listing agent on the phone relatively early on in our underwriting process, when we say hey, these numbers look pretty good. I want to call and make sure this property is available before my team spends half an hour putting together a contract package or rootstocks team putting together a contract package for your customer.

If we can get them on the phone and find out and kind of take their pulse of where they're at. Are they expecting offers? Or are we the first one, we can kind of change our strategy based on feedback, that listing agent somewhat forthcoming with in a lot of instances, but I would say over 50% of time, you don't get somebody on the phone, you say I'm not missing this deal. I'm making the offer, I'll just put an expiration on there.

Michael:

Sure. I think that goes to hammer the point that we harp on so often that this is such a relationship centric business, you know, you can get that person on the phone and you're agreeable, and they're agreeable. There's a lot of stuff you can glean from that conversation that know is a lot of like shedding light on the situation, you know, that you had no idea about going into?

Dan:

Yeah, and it's also a good opportunity for us to explain who we are, if they're not familiar with Roofstock or Excalibur. Give them a little brief history of our processes. You know, there's a lot of investment companies that will throw offers out there. Their technique is every time I'm going to go ask for a significant discount after the inspection. We try to make sure our reputation is such where we make an offer and if we do have to cancel the agreement because of the findings in the inspection, we're typically not tying them up for the entire length due diligence period. So that one, while it may not have worked out, they're not going to, you know, brush our offer to the side the next time or two, we make a competitive offer. And we go and find out the findings are in line with what we thought and there may be a minimal reduction, but it's something that both parties can live with. And, you know, the seller achieves their goals as well as the buyer finding an opportunity and a competitive market,

Tom:

Relationships, relationships man.

Michael:

Yeah, relationships and also reputation. I mean, that is definitely going to proceed, folks, I think much more so than they realize, especially if they're repeat customers in the same market. I know that if someone sees the same players pulling the same tricks over and over again, there's no way that anyone's going to want to do business with them. And that kind of stuff gets around right? You hear about those kind of folks pretty quick.

Dan:

Absolutely.

Tom:

Let's go ahead and jump into Atlanta, a lot of good stuff to cover. And the way they want to start this discussion is talking about different pockets in Atlanta. So as much as we can use kind of landmarks, either, you know, cities or freeways, how would you typically talk to an investor, you know, in thinking about the different pockets of the different types of returns that you're going to get?

Dan:

We kind of look at Atlanta, more like a clock. So you've got major interstates and highways running through Atlanta going south to north, we're looking up the 75 corridor, more pointing towards the nine or 10 o'clock, our beef got Cobb County running up that way. On the east side, you've got Paulding and Douglas County's directly north is Forsyth and we can kind of just start, I guess we'll just work our way around from swell nine o'clock. So directly north of Atlanta, you've got Roswell, Alpharetta, coming and Dawsonville. Those are traditionally higher priced markets with very high rated schools. So the opportunities there are are going to be less common. Most of the time, when we do find opportunities up that corridor, they're going to be in Cumming, Georgia and Forsyth County, which is an excellent place to invest. But over the last six months, I may have bought five houses, you know, which is a small number compared to what we're typically doing on an annual basis because the inventory is lower, and the pricing is a lot higher.

Tom:

And when talking about higher pricing, we're talking 200,000 Plus, right?

Dan:

Yes, so the medium median price up there is probably going to be the 250 and higher. So you're not going to have a lot of homes that are going to meet the rental house metrics where the rents don't quite keep up with that purchase price. Now, if we could buy there all day, we would focus there as much as possible because of how we expect that area to grow and, and how the schools are performing. So North metro Atlanta as a whole, when you're talking about Cobb, Cherokee, Forsyth, and Gwinnett, and Holme counties, those are all very, very good opportunities for you to buy in as a whole. Obviously, there's going to be schools that range from lower caliber to much higher calibers, but as a whole, they're going to have better quality schools, you're going to have better appreciation rates, but you're also going to see that is intertwined with higher property values.

So with that being kept in mind Gwinnett County and Cobb County have been two very good sources of rental properties for us to buy with blending a higher HPA value, the home price appreciation value with a good cash flow value. So our philosophy is typically built around. We're not always looking at cash flow only. We want to look at how the properties can perform the tenant caliber in a certain area, the length of tenancy, turnkey expenses related to those types of tenants, and the appreciation value and exit value. So we're looking at the internal rate of return as a more important factor into the equation versus the cap rate only. But that goes also back to what we talked about before is what type of investor are we talking to? Are we talking to somebody that's retired and is looking for passive income, so they don't care about appreciation? They're going to leave these properties to someone else. So the monthly cash flow is very important to them, and they don't care how the property appreciates, or is this a younger investor that's building a retirement strategy as part of their portfolio that wants to take advantage of home price appreciation and the monthly cash flow is not quite as important.

As long as their debt service payments are covered, and they've got some extra income each month. They can set aside for reserves and turnkey expenses.

Tom:

I got a question for you, looking at that this clock looking at Atlanta is a clock a question that will sometimes get is you know, you have these smaller cities on the outside, like how far out to that nine o'clock, would you still consider that part of the Atlanta Metro like Dallas Rockmart Temple egg At what point would you say Ah, that's pretty far out where if the economy within Atlanta, you know, people aren't really desperately commuting into there.

Dan:

Yeah, our footprint is rather large and we consider everywhere we are metro Atlanta, so we're roughly a 50-55 mile radius around from Atlanta. So out on that west side that you had mentioned, we would consider Villa Rika. And Dallas and Douglasville and we've recently are getting into Temple. So that's almost on the Alabama line. I wouldn't consider temple quite metro Atlanta. But we are now including that into our portfolio and our footprint. That's an area that I've liked over the last seven or eight years due to expansion in the city, there's only so much land available inside the perimeter. So OTP, which is outside the perimeter seems to be a very good opportunity due to most people are willing to commute a longer way in metro Atlanta versus different parts of the country, just because we were set up differently. And we can talk about transportation later.

But I would consider that West Side a nice path of progress. We've had opportunities there with cheaper land expenses, and with how much our dirt costs here in metro Atlanta, that's been a really good opportunity for builders to build entry level homes that also fit the model for a rental house. So when you're looking at price points that are going to make sense between 150 and say, 240. You're not seeing a lot of that being built anywhere. But that west side and the South Side corridor of Metro Atlanta. So we've been very bullish on Villa Rika, Douglasville and Dallas, because we've had good calf rates, we've had average or above average school districts, and the rental demand has been really strong out there.

Tom:

That's great. That's great.

Michael:

And but at the risk of sounding silly, Dan, I'm going to ask the question, anyhow. Why do people live in Atlanta? And why are people move in there?

Dan:

Well, there's a lot of reasons to be here. Obviously, our cost of living is amazing. So your dollar stretches a long way here. We've got a temperate climate for the snowbirds move in South we don't have Boston's winter, nor do we have Miami summer. So that's a big reason. We've got relatively good schools, it's it's a great place for families. There's a lot to do here. And now it's becoming a big hub for you know, video production and things like that. We're now on the east side, Hollywood, you know, the city of Atlanta itself has a lot of entertainment value, whether it's major sports or entertainment itself, as well as the music scene and your short drive away from a very large man made lake where I live Lake Lanier, which is a lot of fun if you're into watersports, or boating in general. And you're only an hour from Blue Ridge Mountains for people that like to camp or hike or just do the outdoorsy things, we've got a little bit of everything here. And and obviously it's it's an affordable place to live.

Michael:

Great. And who are some of the major employers that are either there now or that you know, are coming into the area?

Dan:

Yeah, we obviously have a large handful of the Fortune 500 guys like Home Depot and Coca Cola ups Delta's here as well, as well as the CDC. So I think those are It's no secret where they're located. One thing was interesting related to you guys, you guys are more in the tech field than I am. But I saw a company Deluxe, I believe, was announced last month that they're putting a new facility here in Sandy Springs, which is just outside of the perimeter in Atlanta. And they're going to have a fin tech operation that's creating about 700 new jobs, which we thought was pretty exciting down there.

Michael:

Very cool. And correct me if I'm wrong, but isn't the Atlanta International Airport, the busiest airport in the world?

Dan:

Oh, absolutely. And when I get to travel into different parts of our nation, I get a little bit jealous of how easy it is to get. And

Michael:

I was in Atlanta a couple times. And yeah, just getting into the airport like, Man, this is a frickin city in LA. So, I mean, it is just remarkable what they do at that Airport.

Dan:

The first experience there is always pretty overwhelming. Once you get used to it, it's it's very easy to navigate. Now here lately, it's been a little bit easier, you know, traffic's been down since everybody's working from home, etc. And the airports kind of experienced the same type of effect.

Michael:

I was just gonna ask Dan, you were mentioning that the kind of Metro radius spans out, you know, about 5055 miles or so. So, as folks are looking at different industries that are moving in different companies that are coming into the Atlanta Metro, how should they be thinking about work movement, employee movement? You know, if I find that a company is moving into the north side of Atlanta, is it appropriate to be thinking that folks living in the south southern part of Atlanta at that six o'clock mark on the clock would be traveling?

Dan:

Well, that's what's kind of unique about Atlanta is a lot of people have a 3040 and even one hour commutes in the car. Not a lot of people are using public transportation because it was set up, you know, incorrectly. It's not super convenient. People would rather sit in their car and listen to a podcast like yours or listen to the radio for an hour rather than the hustle and bustle. That's the Marta train or bus system. If somebody's coming into Atlanta and sees that, you know, their companies can be located on the north side. There's options related to different earners, whether it's a higher earner or somebody that's an entry level position. So that's what's kind of nice about North metro Atlanta or the southern side is that You're going to have different housing options that are going to play into your specific budget that makes it a little bit easier for people to spread out and say, this works best for me individually and my family individually.

Tom:

On continuing the clock rundown. So we're at about we've gone kind of noon, you know, higher end less of a cash flow more of an HPA, we went to nine o'clock that West Side Douglasville talking about kind of a good blend kind of a more popular more recently, why don't we continue our way around it going down to six o'clock, I think that's a little bit more the airport area, what kind of return profile and all that continuing a little circle around.

Dan:

So you're looking at places like Clayton County and Henry County or even South Fulton for that matter are typically going to be higher cash flow areas where you can find rental properties and opportunities, they're going to be a lower price point. And I think there's a lot of us out there that said, Hey, I'm ready to start investing in real estate. And I don't want to spend $250,000, I would rather spend, say 140,000, or $130,000. So there's going to be a lot more opportunity for areas like that to achieve what you're looking for, what you're going to be looking at there is a higher cap rate scenario. So you're going to have a higher rental rate related to that purchase price in an area like that. But typically, you're going to have a lower rated school system typically going to have a lower appreciation value. And you might experience a higher credit and vacancy loss. And you might experience more frequent turnkeys.

Now, that doesn't mean it's going to happen every time. But on average, it's going to happen more often in areas like that. So you're kind of blending the good with the bad there and say you know what, I like the cash flow value of this property. And I'm willing to take a little bit more of a risk on some of these other things happening. But when you do that, we want to make sure that our clients and customers are coached to say, let's make sure that you're set up with a reserve, if you do experience something like this. So if you're one, you've got to replace your tenant, and you already have to repaint a house painted, you know, we pay roughly $1.10 a square foot for an interior paint with walls trim and doors. So if you're looking at a 2000 square foot home, and you're going out there and spending a couple thousand dollars to repaint it, year two then that's you know, it's a big chunk of cash that not everybody's willing to experience, a lot of people want to come into the market, say, I'm buying a house, and it's going to make me money from here on out.

You know, that's that's not how investing works for everybody. And I'm sure that's not how it works in the stock market for them either. So we just coach them to say, here's what you might experience in an area like that. But there's a lot of positives of being down there building a portfolio like that. And you may experience a tenant that stays for 10 years and never calls you once and pays on time every time. Or you may replace your tenant every couple of years and deal with some you know, above average turnkey expenses. But that's going to be more common in those types of areas. So you've got Henry County, I like Stockbridge and McDonald a lot. They've got some marginal schools that are are, I would say average where you can find good cash flow properties over there. We still do a lot over on the Clayton side. Jonesborough has a lot of really high cash flow opportunities there. Again, the negative stuff we've already discussed. But the positive there is that the return is really good when the tenant stay.

Michael:

Dan, you're familiar with the 1%? Rule right?

Dan:

Yes.

Michael:

So is that in South County? Will we be looking to find properties that may meet that metric?

Dan:

Yes. So while we can still find opportunities like that, there's a lot less of them now than there used to be. And that's due to this supply and demand that we've been talking about. So with that being said, we're getting close to the 1% rule on average. And every once in a while we're getting the 1% rule. You got to factor into sometimes those are going to take into account having an attached property, which would be a townhouse. We don't typically recommend buying condos down here. But a townhouse would be an attached versus a detached single family home, those are typically going to have a higher HOA payment per month than what you might experience with a detached home for a similar price point in a similar area. So while you've got that 1300 dollar rent on $130,000 property, you might see a 85 to $150 a month HOA whereas if you found a detached property with that rental rate, typically the HOA is going to either be zero in an area like that or much smaller than what you might experience with a townhouse

Tom:

Are HOAs pretty common throughout Atlanta?

Dan:

They are, they're very common part of having boots on the ground like Excalibur with you guys are with our clients during our due diligence period, we're typically getting a copy of the covenants and restrictions to make sure that one we don't have a leasing restriction or cap. You know, if there is a cap, it's pretty risky for people to go in and say this is going to work for me forever because they might find out losing a tenant Three years later, cap has been met, you're no longer allowed to lease this house. So we want to take that into consideration. We also want to make sure that the HOA covenants weren't written in a way where they can go back and change the rental restrictions later with a vote that we may be included on but It may not go our way. So those are things we'll look at during the due diligence period to limit our exposure to something like that having being forced to sell at an earlier time than you had projected.

Michael:

Did I hear you right when you said you would steer folks probably away from condos down in the Atlanta area, but not from townhomes.

Dan:

Correct. Most of the time. condos, if they're going to be in an area that our clients are going to want to be our tenants are gonna want to be or my employees are going to want to be typically the HOA and condo fees are going to be pretty high and they're going to dip into the cash flow significantly whereas the townhouse typically will experience a slightly better appreciation and these price points and it will have a lower Hoa fee.

Michael:

Got it. Got it. Okay. And I want to circle back to property taxes. But go ahead, Tom, and they want to finish up on three o'clock.

Tom:

Yes, look at the clock through so All right, we've gone north, we've gone West, we've gone south, let's make our way over to three o'clock. So like the Lithuania's and Stone Mountains and…

Dan:

Yes, so Stone Mountain Decatur like Sonia, those are all going to have, again, higher cash flow opportunities and lower price points where you're not going to get that on the north Metro side, I think the one difference is on Decatur, you're going to have different pockets. So you could have a part of Decatur that's trading in the millions and then maybe five minutes, 10 minutes down the road going to the hundred and $30,000 price points, there's a little bit of a difference in what you're going to find out there. We're obviously not going to be finding rental homes in that million dollar pocket. But there are good opportunities there. Again, those are that's going to be an area where the public schools aren't performing quite as well as what you're gonna see on the north side or the west side. Or even there's a couple schools that we like on the south side as well. It's just a lower average of them.

Outside of that there's a there's a lot of opportunity for fix and flip or forced equity plays in DeKalb. County, whether it's Stone Mountain life onya or Decatur. So if the risk tolerance for the investor is a little bit higher, and they say hey, you know what, I'm okay with not doing a move in ready home, I've got 3040 $50,000 for you guys to not only fix something but renovate something and upgrade it, then there's opportunities there from time to time where you can spend a little bit more money have a little bit more day one equity and generate a really good return based on what type of rents were able to generate for something like that.

Tom:

On the furthest reaches east. Do you guys manage over an Athens?

Dan:

We do not manage out in Athens we do a lot in Gwinnett County, and Logan Ville is an area that I liked a lot for a very long time buying rental properties. They've got good schools, and it's a little bit more rural, but it's a very strong rental demand. And you get a lot of bang for your buck as far as the houses go out there if we can find the opportunity. And that bleeds into Walton county right there on the on the east side as well. So that's an area that we've liked out there as well.

Michael:

You good on the clock, Tom.

Tom:

Yep.

Michael:

Perfect. So Dan, I know from county to county property taxes can vary pretty widely. But are you able to give folks a real rough broad picture of what they could expect to say in property tax what they could expect to pay in property taxes? And talk a little bit about how property taxes work is based on purchase prices at some county assessed value.

Dan:

Yeah, essentially, county by county and zip code by zip code, we're going to have different millage rates for for each area, the tax assessor are going to have an assessed value. So they're going to use that as a calculation to say, you know, if our assessed value is x, and our millage rate is x, we'll multiply the two to come up with our tax bill in different areas are going to have different, higher and lower taxes. So whereas Fulton County's got pretty high taxes, going a little bit farther north and Riverside, you could be an Alpharetta, Fulton and have really high taxes or Alpharetta, Forsythe and have much lower taxes. So we're going to look at that on a case by case basis for the investor. And a lot of times the listings or projections that investor might see are not going to accurately reflect what they're going to get. So we'll give them an idea of based on what we're seeing and the appreciation that we're looking at from the assessed value now to when you purchase it and the new values applied, you might expect say a two or $300 increase, they've got a good idea on how they're going to budget that.

Michael:

Great. And so as an investor looking to identify what their property tax rate might be, does the assessed value have any correlation to the purchase price or the fair market value or if there's some kind of regularly assessed new assessment at some kind of regular interval that independent of a sale, it's going to increase or decrease just kind of depending on what the markets doing?

Dan:

So typically, you know, if you own a property for a while the assessed values not going to significantly go up even if you're renovating because they don't know you might see something where somebody purchased a home last year for $100,000 but $30,000 into it and then we buy it for $150,000 you're going to see a pretty significant jump In the taxes from the previous year to this year, due to something like that the home is identical when you're selling it, typically the assessed value is going to go up at a reasonable pace based on what's happening in the overall market. The assessors aren't always typically going to go into each individual house and say this house is worth X amount of dollars, they're going to kind of use metrics from how a certain cities performing or a certain zip code is performing.

Michael:

Okay?

Tom:

Have you guys had any success in challenging the assessed value in trying to lower the property taxes?

Dan:

About 50% of the time? It's kind of like contesting an appraisal, you know, the problem with that is, is you have to know what you're getting into, because it could go the other way, too, you know, with an appraisal, you say, Hey, I think you're wrong. Here's why. And they say, Oh, yeah, I was wrong. Now, I'm going to do it the opposite way.

Michael;

I'm gonna go way low.

Dan:

Yeah, recently, my family has a house up on the lake, where we didn't quite agree with all that was assessed, and we had an appraisal, and they still weren't willing to change it. So it really depends on what county you're in, and who you're talking to. It's very localized government. So at that point, it depends on how successful or how lucky you might get and how valid your case might be.

Michael:

So it sounds like a sale might trigger a new assessment, a sale of a property could trigger a reassessment. Right, so well, they're going to put out those bills annually. So when they see that the property is traded hands at a much higher value, then they're going to take notice of that. Yes.

Michael:

Got it. Okay, cool. Talking about kind of price points, you touched on a little bit kind of north, south, east and west. But maybe you could touch on average price point for a three, two single family and what the average rent might look like to give folks an idea of where based on their budget, where might they should be fair, that they should be? Where should they maybe consider looking?

Dan:

Yeah, if I generalize it, I would say if I was looking at a higher cash flow opportunity for $130,000, I'm typically looking for something between 1200 and 1350. k, let me use a different number, because they're not going to find anything like that in the north metro area. So if I said, hundred and $50,000, then I might be looking somewhere between 1400 or so probably for the rent. If I was $150,000, say in a really good school district on the north side, I'm typically going to be looking at 1275 to 1300. So there's a pretty good gap there. And on the you know, the higher cash flow stuff, you could probably get something closer to 1% rule every once in a while. But on average, it'll be closer to that 1400 1425.

Michael:

So the Delta in rents between I guess, within the south side of the north side is about 150 to $200 a month, would you say?

Dan:

Roughly, and again, this is all going to be specific to each individual home and each individual city, but that's probably a good rule of thumb to generalize that.

Michael:

Okay, fantastic.

Tom:

Is section eight, pretty prevalent threadably. And we'd love to hear your guys's experience, we have an episode coming out, or might come out before this one where we talked to an attorney about section eight, just talking about how different is from, you know, city to city anyways, I'd love to hear your input.

Dan:

Yeah, we do manage section eight, we don't manage a ton of section eight, my brother would be a little bit more well versed since he's on that side of the company on the management division. But as far as I know, the housing authorities react a little bit differently, some are a little bit easier to work with than others. For the most part, our experience has given us kind of an end to where we know how the system works. So we can do things rather efficiently now. So while we would prefer non section eight over section eight, as far as management and the workload that goes along with it, it's not something that has as much of a stigma that would say as it used to, I know a lot of landlords say, I don't want to deal with that. But in the city of Atlanta, it's not like you can refuse it.

So if your only opportunity is a section eight tenant, then that's something you're going to have to acknowledge and rent to you can't just deny an application due to section eight in certain areas.

Michael:

Dan, I want to ask you about a real hot button issue that everybody's talking about COVID-19. A lot of folks both on the buying and selling side are where sky is falling prices are going to plummet renters are going to stop paying rent. curious to know what you've seen out in Atlanta, both from a price point perspective on the sales side. And then as a rental collection side on the management.

Dan:

Yeah, related to sales from 2019 to 2020. On attached and detached we saw 2% increase in the average sales price. So still continuing to go up not as quickly as it has due to our economic recovery, but we're still seeing increases and we don't really have a reason to believe that that's gonna change mostly due to our low inventory and high demand. So that being said, we haven't really been affected by COVID-19 or the pandemic. I think the main thing as far as our jobs as real estate agents and realtors has been occupied showings has probably been the biggest hurdle so it's a little bit more difficult to get everybody's schedule along. And make sure people are following proper protocols with, you know, coverings for their shoes hands and face and disinfecting the home and things of that nature.

But with a vacant property, they're still selling in a matter of hours and sometimes just a couple of days. So we're moving product very quickly, the appreciation from last year to this year for detached housing has gone up about 7% in metro Atlanta, whereas attached only went up about 4%. So for the people out there concerned more about the internal rate of return versus the cash flow detached seems to be a better opportunity in metro Atlanta. As far as how that's affected us on the rental side, in the property management side, I would say during the height of the pandemic, we had about an 8% change and rent collection, but that has been steadily getting better month by month. So it was not near as significant as other parts of the country, you know, due to a lot of different factors of one us being a central business and to reopening a little bit earlier. So things you know, didn't seem quite the same in our part of the country as it did in others.

So outside of that we're actually having a record year as far as leasing properties, you know, in previous years and our highest volume months. You know, during the summer, we're typically expecting 70 new move ins are 70 new leases, whereas this summer, we're doing, you know, 140 150 so we were…

Michael:

Holy smokes!

Dan:

We were doing a great job getting people moved in and following safe protocols with some different approaches that we took to closing our office to the public and changing out our lock boxes to accompany showings and move ins and things of that nature. So we worked around what was in front of us and found a way to be really efficient with what was going on.

Tom:

That's incredible about the appreciation and just for clarification for folks who are not familiar with the term detached or attached a detached would be a single family home where an attached to them would be possibly like a condo. So even more reasons to invest in single family over over condos that that huge jump in appreciation over condos.

Dan:

Exactly.

Tom:

That's fantastic.

Michael:

I think Dan, that just goes to further drive home the point that it's so important to understand your local market, nationally might not be the same story as what's going on locally. Atlanta is the prime example. We hear doom and gloom, but really, you guys are killing it.

Dan:

Right.

Michael:

So that's That's great to hear. Great to hear.

Dan:

Yeah, it doesn't look the same. But we're still getting it done.

Tom:

A few more questions. Our last couple of minutes we have here. So a term investors like to throw around is near my son Charlie shining into he's throwing around some investments. Yeah, exactly. is the term investor friendly. Right. And that could have to do with rent control eviction moratoriums, where does Atlanta sit with regards to rent control and that kind of stuff?

Dan:

Well, that's fortunate that we don't have to deal with that we've seen in other parts of the country that have you see investors leaving kind of hurts the tenants more so the investor they can pull their money out and go reinvest somewhere else, and now they've got less product and opportunity for them to find a rental house. So we have a large rental market here, because that's not something that we have to deal with locally. And it's not something we expect to have to deal with anytime soon. As far as the evictions that has been something that we dealt with during the pandemic, because our courts were closed just like everybody else's were. So Excaliber’s philosophy was let's get with our owners, our landlords, and let's work out payment arrangements with tenants. Let's forgive late fees that obviously we couldn't go to court and, and, and argue about anyway.

And let's make this as feasible as possible to collect what we can collect during these times and get everybody back on track. And that's reflected in the change of percentage of our collection not going drastically the wrong direction. So the courts have reopened, and we're getting pretty caught up. So anybody that was unable to make payment arrangements or their situation wasn't able to change, we've been able to release most of those properties as we're able to get them out through that process.

Tom:

That's great to hear working with the tenants and the owners and coming up with payment plans and being human about it. So that's, that's great to hear.

Michael:

Tom, I don't think I have anything else.

Tom:

I got a good question to end with Dan. So we've been away from Atlanta for five years, you Lance and you got to get a meal. Where are you getting? Where would you record? Where would you go to get your meal in Atlanta where you haven't been there in a long time and feel free to use, you know, North suburbs or wherever, wherever else. So

Dan:

That's a good question.

Tom:

Tell you what, you gotta throw two meals in there. You get a fancy meal and you get Yeah, this is my go to you know. So two meals.

Dan:

That's a good question. I would probably say I want to get some local pizza Antiquos. They've got a couple different locations around Atlanta. I don't know why I like it so much. I do. I just do. It's delicious. It's a little bit light and airy trust.

Tom:

Like an Italian kind of, you know, thin crust.

Dan:

Yeah, yeah. So you can smash more pizza than you would want to.

Michael:

Such a good point.

Dan:

Other than that, I have a really good friend up near where I live that owns a barbecue restaurant called Q barbecue that I like a lot. So I would probably go back to that order, whatever their sampler platter is and just work my way through it until I go to sleep

Tom:

Beautiful

Michael:

Does Atlanta have their own style of barbecue?

Dan:

Not really, you know, Atlanta is kind of a melting pot, which is why, you know, we're growing so rapidly. We've got people that do it kind of in a Georgia way, which is a blend of some of the Southern ways, but you've got, I think everything out here, but Texas, I think Texas is the only people that can do Texas barbecue. So we don't try to do that. But I would say this, this one's probably more Kansas City style with a little bit of South Carolina mixed in with the vinegar based sauces and stuff like that.

Michael:

I’m drooling now.

Tom:

Sounds great, awesome. Any final thoughts for investors looking at Atlanta,

Dan:

Contact Roofstock. Today, we've got new opportunities going on the site every day. You know, Excalibur is the boots on the ground as the local broker with just this last year, we've partnered up with you guys on that side. We've obviously been managing you guys for many years now. But keep an eye on the site. There's new inventory going up, just remember that it's going quickly. So if you see it that day, make a decision and give us an opportunity to get it under contract for you. And from that point, I think you'll be pleased with the process that Roofstock has put in place and calibers local knowledge will kind of help you throughout that process, making sure you're making a wise choice.

Tom:

Thank you so much, Dan, this is a very informative.

Michael:

And Dan, if folks have questions about the Atlanta market about Excalibur what's the best way they can get in touch with you,

Dan:

You can visit our website at Excaliburhomes.com, we've got a web portal there where you can send us a message and either myself or my team will reach out to you responsively. So you’ll probably hear from us same day in most cases.

Tom:

Fantastic.

Michael:

Dan you're the man, thank you so much for taking the time to hang out.

Dan:

Absolutely it’s a pleasure. And we'll talk to you guys soon.

Michael:

All right. Take care.

Tom:

Dan, thank you so much again for jumping on and thank you everybody for listening to The Remote Real Estate Investor. If you enjoyed this episode, enjoyed the podcast. we'd love it if you would subscribe and give us a review. All right. Happy investing.

Michael:

Happy investing.

Tom and Michael chat with Dan Nelson from Excalibur Homes about the specifics of the Atlanta Market. 

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On today's episode, we're going to be deep diving in the Atlanta market. And we're here today with Dan Nelson. And I'm also here with

Michael:

Michael Albaum.

Tom:

All right, let's do it.

Tom:

Before we jump into the interview, let's touch on some of the quantitative aspects of the Atlanta market. So this information is coming from the Census Bureau, Macrotrends as well as John Burns. First, I'm going to talk about the population in Atlanta proper, just over 500,000 individuals in the greater MSA population, there is just under 6 million so 5,000,800 and we've seen a population growth of 2%. Over the last year, the median household in Atlanta that's $71,000. The existing home values year over year has increased by 5.5%. And the effective apartment rent has increased by 2.4%.

The home value entry level according to John Burns is at $196,000. The existing median home price is $279,000, then median single family rent is $1,364. And the year over year rent growth of that single family has grown a whopping 5.6%. The single family gross yield is 7.8%. Jumping into a different category. Let's talk about the occupancy rate. So the occupancy rate in Atlanta is 91.3%. The number of unique units properties are artists 2,331,002. And of that the owner occupied mix up 59% of that or 1.367 million, renter occupied and makes up just over 750,760 9000 to be exact, and vacant right now is a little bit under 200,000. And that's at 8%. All right, let's jump into the interview.

Excellent. So before we jump into the Atlanta specifics, Dan, I'd love to hear a little bit about yourself and the company that you work for and all that good stuff.

Dan:

Yeah, my name is Dan Nelson. I'm the VP of Sales with Excalibur homes. I'm a third generation realtor. My grandmother, Mary Nelson was just recently inducted into the DeKalb County Hall of Fame for realtors, which was exciting for the family. My dad, Mike Nelson, the founder of Excalibur started the company back in 1985, he had a primary focus towards property management versus sales looking for a little bit more stability for himself and our family. While he was at the same time simultaneously was in the National Guard, flying helicopters, my brothers and I all grew up within the company. So we started in, you know, Middle School in high school with learning turnkey, and construction and landscaping during the summers as well as once we were old enough to drive taking administrative positions within the company, learning everything from the ground up, essentially how to each department operate, understanding each job and also working each job for a couple years at a time.

I took a brief stint down in Florida, working in the multifamily industry with some with a company out of Tampa called 908. Development, they did a low income tax credit company where they did a high rise in downtown St. Pete. So I handled the lease up and stabilization of that project that was in the 2009 to 2011 timeframe, I had my Florida real estate license down there. While I didn't need it for that job, particularly, I moved back to Atlanta in 2012, I had my Georgia real estate license here. And that was about the time 2011 2012 we started seeing institutional folks and through the Atlanta market, doing things we've never really seen before buying properties on a level that was kind of unheard of in the SFR space, you know, typically they were not really big players and this type of market until then.

So when I came back, it said, Hey, Dad, you know, we're going to go buy a couple hundred houses at a time, you know, not five, not 10. So it's a very exciting time for us to go through and one learn how an institutional level underwriting works, how they're evaluating homes, you know, what they're going to consider capitalize expenses versus what a mom and pop investor might. And the level of buying was very interesting for us to learn how to navigate and compete with some of the larger funds out there at the courthouse steps, essentially, you know, we'd have teams go out on the Tuesday of the month when they were trying loans. And we'd go out there with a big stack of certified checks and hope that we would win as many bids as possible. As well as putting out you know, 50 to 100 offers a day on the MLS trying to capture as many opportunities as possible.

So that, for me was probably the most valuable experience in the shortest amount of time for real estate related to acquiring investment properties for investors. And that experience has translated very well to assisting our mom and pop investors as well as Roofstock customers that are entering Atlanta's market to understand how big of an area we were in and each individual sub market that we're in and how different types of properties are going to perform over a certain period of time. And from there, I got promoted to Vice President of Sales. So now my job entails growing our team, you know, marketing and making sure that we're bringing in more customers assisting customers like yourself, acquiring as many properties and good opportunities, giving good counseling advice as to what type of investment strategy might be best for certain buyers, whether it's, I'm looking for a capital gains type play, or I'm looking for more of a retirement play, whatever it may be, depends on which investors and what stage of their life and what's most important to them.

But we take that into consideration much like you guys do to building a customized buy box for certain buyers. Excalibur as a whole is kind of a full service company, whereas we manage about 2500 homes here in metro Atlanta are one of the larger companies in metro Atlanta, with a pretty large footprint. We're in 12 to 15 counties. We're located here in Alpharetta, Georgia, which is about 30 minutes north of Atlanta itself. And we've been here for 35 years. The property management is what it is we're obviously going to handle properties for owners make sure that we're addressing tenants leases moving in tenants address Seeing work orders to maintain properties etc on call maintenance. But at the same time, we have a sales division that's going to help people acquire and build portfolios or help them exit the market at a certain time.

Tom:

So, Dan, super interesting. Full disclosure, I'm an Excalibur customer, a happy Excalibur customer. But one thing I didn't know was that Excalibur had been in business since 1985. And and you given the background, I thought it was interesting, talking about how, you know, things changed in 2010 2012. All this institutional capital came in, how did all of that change the process, specifically around like evaluation, and then any other changes with management and what kind of changes that that look like?

Dan:

On the acquisition side, it definitely sped up our timeframe. So whereas traditionally, you would go out, take a client to a house, walk through it, you know, determine exactly what your plan is, prior to making an offer. We're now sending out sight unseen offers and making our best judgment on renovation budgets based on our experience and how much renovation we do, and we're doing, you know, millions of dollars in turnkeys, and large renovations, as well as new constructions, we have a very good pulse on what's happening in the construction side of the market, which is very beneficial to our clients. The timing of it is you've probably seen this before, when you're trying to acquire a home, there's a lot of people trying to acquire homes. So from last year to this year, in September last year, we had roughly 20,000 active listings

This year, we're down about 48% in the month of September for 2020. So obviously, the demand keeps increasing supply has been going down, which makes it more competitive for us to get properties under contract. So our technique is putting out offers with our best judgment on what the property value in its current condition in estimating what a renovation is going to cost us on the front end, so that we can get that property under contract before they see 1520 other offers from other investors and owner occupants that are still competing in this price point. And then from there, we'll go out there and one of the main selling points on Excalibur is we're able to go out there and you know, one to two days with the construction team and say it's exactly $12,000, or it's exactly $5,000. So if we were off on our initial judgment, we know within a matter of days that we can renegotiate this deal, or we found something that gives us the opportunity to pull out because it's too significant for us to one be able to renegotiate with the seller or to it's beyond the comfort level of another investor and something they might be willing to spend for a renovation.

So that's one of the main things is the speed of which the transactions are happening right now and the competitiveness of the market. So I think it's it's no secret that Atlanta has been a good opportunity for people nationwide and worldwide. So once institutional guys got here that created a level of competition we weren't ready for and we got used to. And now we're kind of changing with the times on a monthly basis instead of a yearly basis.

Michael:

Dan, kind of in that same vein is more of a strategy question. Are you the offers that you're writing? Are you giving them an expiration date of 24 hours or 48 hours that the seller is forced to give you a response? Because in some markets, like especially in California, it's so hot, it's so competitive, you want to give the seller a deadline so that they're not looking at other offers, but also want to be flexible enough so that they consider your offer, as opposed to they know they're getting 10-12-15 other offers? How do you play that?

Dan:

The short answer is yes, in most cases, we're going to give them an expiration of 24 hours from the time of delivery. The long answer is it's a case by case scenario. So if we can get a listing agent on the phone relatively early on in our underwriting process, when we say hey, these numbers look pretty good. I want to call and make sure this property is available before my team spends half an hour putting together a contract package or rootstocks team putting together a contract package for your customer.

If we can get them on the phone and find out and kind of take their pulse of where they're at. Are they expecting offers? Or are we the first one, we can kind of change our strategy based on feedback, that listing agent somewhat forthcoming with in a lot of instances, but I would say over 50% of time, you don't get somebody on the phone, you say I'm not missing this deal. I'm making the offer, I'll just put an expiration on there.

Michael:

Sure. I think that goes to hammer the point that we harp on so often that this is such a relationship centric business, you know, you can get that person on the phone and you're agreeable, and they're agreeable. There's a lot of stuff you can glean from that conversation that know is a lot of like shedding light on the situation, you know, that you had no idea about going into?

Dan:

Yeah, and it's also a good opportunity for us to explain who we are, if they're not familiar with Roofstock or Excalibur. Give them a little brief history of our processes. You know, there's a lot of investment companies that will throw offers out there. Their technique is every time I'm going to go ask for a significant discount after the inspection. We try to make sure our reputation is such where we make an offer and if we do have to cancel the agreement because of the findings in the inspection, we're typically not tying them up for the entire length due diligence period. So that one, while it may not have worked out, they're not going to, you know, brush our offer to the side the next time or two, we make a competitive offer. And we go and find out the findings are in line with what we thought and there may be a minimal reduction, but it's something that both parties can live with. And, you know, the seller achieves their goals as well as the buyer finding an opportunity and a competitive market,

Tom:

Relationships, relationships man.

Michael:

Yeah, relationships and also reputation. I mean, that is definitely going to proceed, folks, I think much more so than they realize, especially if they're repeat customers in the same market. I know that if someone sees the same players pulling the same tricks over and over again, there's no way that anyone's going to want to do business with them. And that kind of stuff gets around right? You hear about those kind of folks pretty quick.

Dan:

Absolutely.

Tom:

Let's go ahead and jump into Atlanta, a lot of good stuff to cover. And the way they want to start this discussion is talking about different pockets in Atlanta. So as much as we can use kind of landmarks, either, you know, cities or freeways, how would you typically talk to an investor, you know, in thinking about the different pockets of the different types of returns that you're going to get?

Dan:

We kind of look at Atlanta, more like a clock. So you've got major interstates and highways running through Atlanta going south to north, we're looking up the 75 corridor, more pointing towards the nine or 10 o'clock, our beef got Cobb County running up that way. On the east side, you've got Paulding and Douglas County's directly north is Forsyth and we can kind of just start, I guess we'll just work our way around from swell nine o'clock. So directly north of Atlanta, you've got Roswell, Alpharetta, coming and Dawsonville. Those are traditionally higher priced markets with very high rated schools. So the opportunities there are are going to be less common. Most of the time, when we do find opportunities up that corridor, they're going to be in Cumming, Georgia and Forsyth County, which is an excellent place to invest. But over the last six months, I may have bought five houses, you know, which is a small number compared to what we're typically doing on an annual basis because the inventory is lower, and the pricing is a lot higher.

Tom:

And when talking about higher pricing, we're talking 200,000 Plus, right?

Dan:

Yes, so the medium median price up there is probably going to be the 250 and higher. So you're not going to have a lot of homes that are going to meet the rental house metrics where the rents don't quite keep up with that purchase price. Now, if we could buy there all day, we would focus there as much as possible because of how we expect that area to grow and, and how the schools are performing. So North metro Atlanta as a whole, when you're talking about Cobb, Cherokee, Forsyth, and Gwinnett, and Holme counties, those are all very, very good opportunities for you to buy in as a whole. Obviously, there's going to be schools that range from lower caliber to much higher calibers, but as a whole, they're going to have better quality schools, you're going to have better appreciation rates, but you're also going to see that is intertwined with higher property values.

So with that being kept in mind Gwinnett County and Cobb County have been two very good sources of rental properties for us to buy with blending a higher HPA value, the home price appreciation value with a good cash flow value. So our philosophy is typically built around. We're not always looking at cash flow only. We want to look at how the properties can perform the tenant caliber in a certain area, the length of tenancy, turnkey expenses related to those types of tenants, and the appreciation value and exit value. So we're looking at the internal rate of return as a more important factor into the equation versus the cap rate only. But that goes also back to what we talked about before is what type of investor are we talking to? Are we talking to somebody that's retired and is looking for passive income, so they don't care about appreciation? They're going to leave these properties to someone else. So the monthly cash flow is very important to them, and they don't care how the property appreciates, or is this a younger investor that's building a retirement strategy as part of their portfolio that wants to take advantage of home price appreciation and the monthly cash flow is not quite as important.

As long as their debt service payments are covered, and they've got some extra income each month. They can set aside for reserves and turnkey expenses.

Tom:

I got a question for you, looking at that this clock looking at Atlanta is a clock a question that will sometimes get is you know, you have these smaller cities on the outside, like how far out to that nine o'clock, would you still consider that part of the Atlanta Metro like Dallas Rockmart Temple egg At what point would you say Ah, that's pretty far out where if the economy within Atlanta, you know, people aren't really desperately commuting into there.

Dan:

Yeah, our footprint is rather large and we consider everywhere we are metro Atlanta, so we're roughly a 50-55 mile radius around from Atlanta. So out on that west side that you had mentioned, we would consider Villa Rika. And Dallas and Douglasville and we've recently are getting into Temple. So that's almost on the Alabama line. I wouldn't consider temple quite metro Atlanta. But we are now including that into our portfolio and our footprint. That's an area that I've liked over the last seven or eight years due to expansion in the city, there's only so much land available inside the perimeter. So OTP, which is outside the perimeter seems to be a very good opportunity due to most people are willing to commute a longer way in metro Atlanta versus different parts of the country, just because we were set up differently. And we can talk about transportation later.

But I would consider that West Side a nice path of progress. We've had opportunities there with cheaper land expenses, and with how much our dirt costs here in metro Atlanta, that's been a really good opportunity for builders to build entry level homes that also fit the model for a rental house. So when you're looking at price points that are going to make sense between 150 and say, 240. You're not seeing a lot of that being built anywhere. But that west side and the South Side corridor of Metro Atlanta. So we've been very bullish on Villa Rika, Douglasville and Dallas, because we've had good calf rates, we've had average or above average school districts, and the rental demand has been really strong out there.

Tom:

That's great. That's great.

Michael:

And but at the risk of sounding silly, Dan, I'm going to ask the question, anyhow. Why do people live in Atlanta? And why are people move in there?

Dan:

Well, there's a lot of reasons to be here. Obviously, our cost of living is amazing. So your dollar stretches a long way here. We've got a temperate climate for the snowbirds move in South we don't have Boston's winter, nor do we have Miami summer. So that's a big reason. We've got relatively good schools, it's it's a great place for families. There's a lot to do here. And now it's becoming a big hub for you know, video production and things like that. We're now on the east side, Hollywood, you know, the city of Atlanta itself has a lot of entertainment value, whether it's major sports or entertainment itself, as well as the music scene and your short drive away from a very large man made lake where I live Lake Lanier, which is a lot of fun if you're into watersports, or boating in general. And you're only an hour from Blue Ridge Mountains for people that like to camp or hike or just do the outdoorsy things, we've got a little bit of everything here. And and obviously it's it's an affordable place to live.

Michael:

Great. And who are some of the major employers that are either there now or that you know, are coming into the area?

Dan:

Yeah, we obviously have a large handful of the Fortune 500 guys like Home Depot and Coca Cola ups Delta's here as well, as well as the CDC. So I think those are It's no secret where they're located. One thing was interesting related to you guys, you guys are more in the tech field than I am. But I saw a company Deluxe, I believe, was announced last month that they're putting a new facility here in Sandy Springs, which is just outside of the perimeter in Atlanta. And they're going to have a fin tech operation that's creating about 700 new jobs, which we thought was pretty exciting down there.

Michael:

Very cool. And correct me if I'm wrong, but isn't the Atlanta International Airport, the busiest airport in the world?

Dan:

Oh, absolutely. And when I get to travel into different parts of our nation, I get a little bit jealous of how easy it is to get. And

Michael:

I was in Atlanta a couple times. And yeah, just getting into the airport like, Man, this is a frickin city in LA. So, I mean, it is just remarkable what they do at that Airport.

Dan:

The first experience there is always pretty overwhelming. Once you get used to it, it's it's very easy to navigate. Now here lately, it's been a little bit easier, you know, traffic's been down since everybody's working from home, etc. And the airports kind of experienced the same type of effect.

Michael:

I was just gonna ask Dan, you were mentioning that the kind of Metro radius spans out, you know, about 5055 miles or so. So, as folks are looking at different industries that are moving in different companies that are coming into the Atlanta Metro, how should they be thinking about work movement, employee movement? You know, if I find that a company is moving into the north side of Atlanta, is it appropriate to be thinking that folks living in the south southern part of Atlanta at that six o'clock mark on the clock would be traveling?

Dan:

Well, that's what's kind of unique about Atlanta is a lot of people have a 3040 and even one hour commutes in the car. Not a lot of people are using public transportation because it was set up, you know, incorrectly. It's not super convenient. People would rather sit in their car and listen to a podcast like yours or listen to the radio for an hour rather than the hustle and bustle. That's the Marta train or bus system. If somebody's coming into Atlanta and sees that, you know, their companies can be located on the north side. There's options related to different earners, whether it's a higher earner or somebody that's an entry level position. So that's what's kind of nice about North metro Atlanta or the southern side is that You're going to have different housing options that are going to play into your specific budget that makes it a little bit easier for people to spread out and say, this works best for me individually and my family individually.

Tom:

On continuing the clock rundown. So we're at about we've gone kind of noon, you know, higher end less of a cash flow more of an HPA, we went to nine o'clock that West Side Douglasville talking about kind of a good blend kind of a more popular more recently, why don't we continue our way around it going down to six o'clock, I think that's a little bit more the airport area, what kind of return profile and all that continuing a little circle around.

Dan:

So you're looking at places like Clayton County and Henry County or even South Fulton for that matter are typically going to be higher cash flow areas where you can find rental properties and opportunities, they're going to be a lower price point. And I think there's a lot of us out there that said, Hey, I'm ready to start investing in real estate. And I don't want to spend $250,000, I would rather spend, say 140,000, or $130,000. So there's going to be a lot more opportunity for areas like that to achieve what you're looking for, what you're going to be looking at there is a higher cap rate scenario. So you're going to have a higher rental rate related to that purchase price in an area like that. But typically, you're going to have a lower rated school system typically going to have a lower appreciation value. And you might experience a higher credit and vacancy loss. And you might experience more frequent turnkeys.

Now, that doesn't mean it's going to happen every time. But on average, it's going to happen more often in areas like that. So you're kind of blending the good with the bad there and say you know what, I like the cash flow value of this property. And I'm willing to take a little bit more of a risk on some of these other things happening. But when you do that, we want to make sure that our clients and customers are coached to say, let's make sure that you're set up with a reserve, if you do experience something like this. So if you're one, you've got to replace your tenant, and you already have to repaint a house painted, you know, we pay roughly $1.10 a square foot for an interior paint with walls trim and doors. So if you're looking at a 2000 square foot home, and you're going out there and spending a couple thousand dollars to repaint it, year two then that's you know, it's a big chunk of cash that not everybody's willing to experience, a lot of people want to come into the market, say, I'm buying a house, and it's going to make me money from here on out.

You know, that's that's not how investing works for everybody. And I'm sure that's not how it works in the stock market for them either. So we just coach them to say, here's what you might experience in an area like that. But there's a lot of positives of being down there building a portfolio like that. And you may experience a tenant that stays for 10 years and never calls you once and pays on time every time. Or you may replace your tenant every couple of years and deal with some you know, above average turnkey expenses. But that's going to be more common in those types of areas. So you've got Henry County, I like Stockbridge and McDonald a lot. They've got some marginal schools that are are, I would say average where you can find good cash flow properties over there. We still do a lot over on the Clayton side. Jonesborough has a lot of really high cash flow opportunities there. Again, the negative stuff we've already discussed. But the positive there is that the return is really good when the tenant stay.

Michael:

Dan, you're familiar with the 1%? Rule right?

Dan:

Yes.

Michael:

So is that in South County? Will we be looking to find properties that may meet that metric?

Dan:

Yes. So while we can still find opportunities like that, there's a lot less of them now than there used to be. And that's due to this supply and demand that we've been talking about. So with that being said, we're getting close to the 1% rule on average. And every once in a while we're getting the 1% rule. You got to factor into sometimes those are going to take into account having an attached property, which would be a townhouse. We don't typically recommend buying condos down here. But a townhouse would be an attached versus a detached single family home, those are typically going to have a higher HOA payment per month than what you might experience with a detached home for a similar price point in a similar area. So while you've got that 1300 dollar rent on $130,000 property, you might see a 85 to $150 a month HOA whereas if you found a detached property with that rental rate, typically the HOA is going to either be zero in an area like that or much smaller than what you might experience with a townhouse

Tom:

Are HOAs pretty common throughout Atlanta?

Dan:

They are, they're very common part of having boots on the ground like Excalibur with you guys are with our clients during our due diligence period, we're typically getting a copy of the covenants and restrictions to make sure that one we don't have a leasing restriction or cap. You know, if there is a cap, it's pretty risky for people to go in and say this is going to work for me forever because they might find out losing a tenant Three years later, cap has been met, you're no longer allowed to lease this house. So we want to take that into consideration. We also want to make sure that the HOA covenants weren't written in a way where they can go back and change the rental restrictions later with a vote that we may be included on but It may not go our way. So those are things we'll look at during the due diligence period to limit our exposure to something like that having being forced to sell at an earlier time than you had projected.

Michael:

Did I hear you right when you said you would steer folks probably away from condos down in the Atlanta area, but not from townhomes.

Dan:

Correct. Most of the time. condos, if they're going to be in an area that our clients are going to want to be our tenants are gonna want to be or my employees are going to want to be typically the HOA and condo fees are going to be pretty high and they're going to dip into the cash flow significantly whereas the townhouse typically will experience a slightly better appreciation and these price points and it will have a lower Hoa fee.

Michael:

Got it. Got it. Okay. And I want to circle back to property taxes. But go ahead, Tom, and they want to finish up on three o'clock.

Tom:

Yes, look at the clock through so All right, we've gone north, we've gone West, we've gone south, let's make our way over to three o'clock. So like the Lithuania's and Stone Mountains and…

Dan:

Yes, so Stone Mountain Decatur like Sonia, those are all going to have, again, higher cash flow opportunities and lower price points where you're not going to get that on the north Metro side, I think the one difference is on Decatur, you're going to have different pockets. So you could have a part of Decatur that's trading in the millions and then maybe five minutes, 10 minutes down the road going to the hundred and $30,000 price points, there's a little bit of a difference in what you're going to find out there. We're obviously not going to be finding rental homes in that million dollar pocket. But there are good opportunities there. Again, those are that's going to be an area where the public schools aren't performing quite as well as what you're gonna see on the north side or the west side. Or even there's a couple schools that we like on the south side as well. It's just a lower average of them.

Outside of that there's a there's a lot of opportunity for fix and flip or forced equity plays in DeKalb. County, whether it's Stone Mountain life onya or Decatur. So if the risk tolerance for the investor is a little bit higher, and they say hey, you know what, I'm okay with not doing a move in ready home, I've got 3040 $50,000 for you guys to not only fix something but renovate something and upgrade it, then there's opportunities there from time to time where you can spend a little bit more money have a little bit more day one equity and generate a really good return based on what type of rents were able to generate for something like that.

Tom:

On the furthest reaches east. Do you guys manage over an Athens?

Dan:

We do not manage out in Athens we do a lot in Gwinnett County, and Logan Ville is an area that I liked a lot for a very long time buying rental properties. They've got good schools, and it's a little bit more rural, but it's a very strong rental demand. And you get a lot of bang for your buck as far as the houses go out there if we can find the opportunity. And that bleeds into Walton county right there on the on the east side as well. So that's an area that we've liked out there as well.

Michael:

You good on the clock, Tom.

Tom:

Yep.

Michael:

Perfect. So Dan, I know from county to county property taxes can vary pretty widely. But are you able to give folks a real rough broad picture of what they could expect to say in property tax what they could expect to pay in property taxes? And talk a little bit about how property taxes work is based on purchase prices at some county assessed value.

Dan:

Yeah, essentially, county by county and zip code by zip code, we're going to have different millage rates for for each area, the tax assessor are going to have an assessed value. So they're going to use that as a calculation to say, you know, if our assessed value is x, and our millage rate is x, we'll multiply the two to come up with our tax bill in different areas are going to have different, higher and lower taxes. So whereas Fulton County's got pretty high taxes, going a little bit farther north and Riverside, you could be an Alpharetta, Fulton and have really high taxes or Alpharetta, Forsythe and have much lower taxes. So we're going to look at that on a case by case basis for the investor. And a lot of times the listings or projections that investor might see are not going to accurately reflect what they're going to get. So we'll give them an idea of based on what we're seeing and the appreciation that we're looking at from the assessed value now to when you purchase it and the new values applied, you might expect say a two or $300 increase, they've got a good idea on how they're going to budget that.

Michael:

Great. And so as an investor looking to identify what their property tax rate might be, does the assessed value have any correlation to the purchase price or the fair market value or if there's some kind of regularly assessed new assessment at some kind of regular interval that independent of a sale, it's going to increase or decrease just kind of depending on what the markets doing?

Dan:

So typically, you know, if you own a property for a while the assessed values not going to significantly go up even if you're renovating because they don't know you might see something where somebody purchased a home last year for $100,000 but $30,000 into it and then we buy it for $150,000 you're going to see a pretty significant jump In the taxes from the previous year to this year, due to something like that the home is identical when you're selling it, typically the assessed value is going to go up at a reasonable pace based on what's happening in the overall market. The assessors aren't always typically going to go into each individual house and say this house is worth X amount of dollars, they're going to kind of use metrics from how a certain cities performing or a certain zip code is performing.

Michael:

Okay?

Tom:

Have you guys had any success in challenging the assessed value in trying to lower the property taxes?

Dan:

About 50% of the time? It's kind of like contesting an appraisal, you know, the problem with that is, is you have to know what you're getting into, because it could go the other way, too, you know, with an appraisal, you say, Hey, I think you're wrong. Here's why. And they say, Oh, yeah, I was wrong. Now, I'm going to do it the opposite way.

Michael;

I'm gonna go way low.

Dan:

Yeah, recently, my family has a house up on the lake, where we didn't quite agree with all that was assessed, and we had an appraisal, and they still weren't willing to change it. So it really depends on what county you're in, and who you're talking to. It's very localized government. So at that point, it depends on how successful or how lucky you might get and how valid your case might be.

Michael:

So it sounds like a sale might trigger a new assessment, a sale of a property could trigger a reassessment. Right, so well, they're going to put out those bills annually. So when they see that the property is traded hands at a much higher value, then they're going to take notice of that. Yes.

Michael:

Got it. Okay, cool. Talking about kind of price points, you touched on a little bit kind of north, south, east and west. But maybe you could touch on average price point for a three, two single family and what the average rent might look like to give folks an idea of where based on their budget, where might they should be fair, that they should be? Where should they maybe consider looking?

Dan:

Yeah, if I generalize it, I would say if I was looking at a higher cash flow opportunity for $130,000, I'm typically looking for something between 1200 and 1350. k, let me use a different number, because they're not going to find anything like that in the north metro area. So if I said, hundred and $50,000, then I might be looking somewhere between 1400 or so probably for the rent. If I was $150,000, say in a really good school district on the north side, I'm typically going to be looking at 1275 to 1300. So there's a pretty good gap there. And on the you know, the higher cash flow stuff, you could probably get something closer to 1% rule every once in a while. But on average, it'll be closer to that 1400 1425.

Michael:

So the Delta in rents between I guess, within the south side of the north side is about 150 to $200 a month, would you say?

Dan:

Roughly, and again, this is all going to be specific to each individual home and each individual city, but that's probably a good rule of thumb to generalize that.

Michael:

Okay, fantastic.

Tom:

Is section eight, pretty prevalent threadably. And we'd love to hear your guys's experience, we have an episode coming out, or might come out before this one where we talked to an attorney about section eight, just talking about how different is from, you know, city to city anyways, I'd love to hear your input.

Dan:

Yeah, we do manage section eight, we don't manage a ton of section eight, my brother would be a little bit more well versed since he's on that side of the company on the management division. But as far as I know, the housing authorities react a little bit differently, some are a little bit easier to work with than others. For the most part, our experience has given us kind of an end to where we know how the system works. So we can do things rather efficiently now. So while we would prefer non section eight over section eight, as far as management and the workload that goes along with it, it's not something that has as much of a stigma that would say as it used to, I know a lot of landlords say, I don't want to deal with that. But in the city of Atlanta, it's not like you can refuse it.

So if your only opportunity is a section eight tenant, then that's something you're going to have to acknowledge and rent to you can't just deny an application due to section eight in certain areas.

Michael:

Dan, I want to ask you about a real hot button issue that everybody's talking about COVID-19. A lot of folks both on the buying and selling side are where sky is falling prices are going to plummet renters are going to stop paying rent. curious to know what you've seen out in Atlanta, both from a price point perspective on the sales side. And then as a rental collection side on the management.

Dan:

Yeah, related to sales from 2019 to 2020. On attached and detached we saw 2% increase in the average sales price. So still continuing to go up not as quickly as it has due to our economic recovery, but we're still seeing increases and we don't really have a reason to believe that that's gonna change mostly due to our low inventory and high demand. So that being said, we haven't really been affected by COVID-19 or the pandemic. I think the main thing as far as our jobs as real estate agents and realtors has been occupied showings has probably been the biggest hurdle so it's a little bit more difficult to get everybody's schedule along. And make sure people are following proper protocols with, you know, coverings for their shoes hands and face and disinfecting the home and things of that nature.

But with a vacant property, they're still selling in a matter of hours and sometimes just a couple of days. So we're moving product very quickly, the appreciation from last year to this year for detached housing has gone up about 7% in metro Atlanta, whereas attached only went up about 4%. So for the people out there concerned more about the internal rate of return versus the cash flow detached seems to be a better opportunity in metro Atlanta. As far as how that's affected us on the rental side, in the property management side, I would say during the height of the pandemic, we had about an 8% change and rent collection, but that has been steadily getting better month by month. So it was not near as significant as other parts of the country, you know, due to a lot of different factors of one us being a central business and to reopening a little bit earlier. So things you know, didn't seem quite the same in our part of the country as it did in others.

So outside of that we're actually having a record year as far as leasing properties, you know, in previous years and our highest volume months. You know, during the summer, we're typically expecting 70 new move ins are 70 new leases, whereas this summer, we're doing, you know, 140 150 so we were…

Michael:

Holy smokes!

Dan:

We were doing a great job getting people moved in and following safe protocols with some different approaches that we took to closing our office to the public and changing out our lock boxes to accompany showings and move ins and things of that nature. So we worked around what was in front of us and found a way to be really efficient with what was going on.

Tom:

That's incredible about the appreciation and just for clarification for folks who are not familiar with the term detached or attached a detached would be a single family home where an attached to them would be possibly like a condo. So even more reasons to invest in single family over over condos that that huge jump in appreciation over condos.

Dan:

Exactly.

Tom:

That's fantastic.

Michael:

I think Dan, that just goes to further drive home the point that it's so important to understand your local market, nationally might not be the same story as what's going on locally. Atlanta is the prime example. We hear doom and gloom, but really, you guys are killing it.

Dan:

Right.

Michael:

So that's That's great to hear. Great to hear.

Dan:

Yeah, it doesn't look the same. But we're still getting it done.

Tom:

A few more questions. Our last couple of minutes we have here. So a term investors like to throw around is near my son Charlie shining into he's throwing around some investments. Yeah, exactly. is the term investor friendly. Right. And that could have to do with rent control eviction moratoriums, where does Atlanta sit with regards to rent control and that kind of stuff?

Dan:

Well, that's fortunate that we don't have to deal with that we've seen in other parts of the country that have you see investors leaving kind of hurts the tenants more so the investor they can pull their money out and go reinvest somewhere else, and now they've got less product and opportunity for them to find a rental house. So we have a large rental market here, because that's not something that we have to deal with locally. And it's not something we expect to have to deal with anytime soon. As far as the evictions that has been something that we dealt with during the pandemic, because our courts were closed just like everybody else's were. So Excaliber’s philosophy was let's get with our owners, our landlords, and let's work out payment arrangements with tenants. Let's forgive late fees that obviously we couldn't go to court and, and, and argue about anyway.

And let's make this as feasible as possible to collect what we can collect during these times and get everybody back on track. And that's reflected in the change of percentage of our collection not going drastically the wrong direction. So the courts have reopened, and we're getting pretty caught up. So anybody that was unable to make payment arrangements or their situation wasn't able to change, we've been able to release most of those properties as we're able to get them out through that process.

Tom:

That's great to hear working with the tenants and the owners and coming up with payment plans and being human about it. So that's, that's great to hear.

Michael:

Tom, I don't think I have anything else.

Tom:

I got a good question to end with Dan. So we've been away from Atlanta for five years, you Lance and you got to get a meal. Where are you getting? Where would you record? Where would you go to get your meal in Atlanta where you haven't been there in a long time and feel free to use, you know, North suburbs or wherever, wherever else. So

Dan:

That's a good question.

Tom:

Tell you what, you gotta throw two meals in there. You get a fancy meal and you get Yeah, this is my go to you know. So two meals.

Dan:

That's a good question. I would probably say I want to get some local pizza Antiquos. They've got a couple different locations around Atlanta. I don't know why I like it so much. I do. I just do. It's delicious. It's a little bit light and airy trust.

Tom:

Like an Italian kind of, you know, thin crust.

Dan:

Yeah, yeah. So you can smash more pizza than you would want to.

Michael:

Such a good point.

Dan:

Other than that, I have a really good friend up near where I live that owns a barbecue restaurant called Q barbecue that I like a lot. So I would probably go back to that order, whatever their sampler platter is and just work my way through it until I go to sleep

Tom:

Beautiful

Michael:

Does Atlanta have their own style of barbecue?

Dan:

Not really, you know, Atlanta is kind of a melting pot, which is why, you know, we're growing so rapidly. We've got people that do it kind of in a Georgia way, which is a blend of some of the Southern ways, but you've got, I think everything out here, but Texas, I think Texas is the only people that can do Texas barbecue. So we don't try to do that. But I would say this, this one's probably more Kansas City style with a little bit of South Carolina mixed in with the vinegar based sauces and stuff like that.

Michael:

I’m drooling now.

Tom:

Sounds great, awesome. Any final thoughts for investors looking at Atlanta,

Dan:

Contact Roofstock. Today, we've got new opportunities going on the site every day. You know, Excalibur is the boots on the ground as the local broker with just this last year, we've partnered up with you guys on that side. We've obviously been managing you guys for many years now. But keep an eye on the site. There's new inventory going up, just remember that it's going quickly. So if you see it that day, make a decision and give us an opportunity to get it under contract for you. And from that point, I think you'll be pleased with the process that Roofstock has put in place and calibers local knowledge will kind of help you throughout that process, making sure you're making a wise choice.

Tom:

Thank you so much, Dan, this is a very informative.

Michael:

And Dan, if folks have questions about the Atlanta market about Excalibur what's the best way they can get in touch with you,

Dan:

You can visit our website at Excaliburhomes.com, we've got a web portal there where you can send us a message and either myself or my team will reach out to you responsively. So you’ll probably hear from us same day in most cases.

Tom:

Fantastic.

Michael:

Dan you're the man, thank you so much for taking the time to hang out.

Dan:

Absolutely it’s a pleasure. And we'll talk to you guys soon.

Michael:

All right. Take care.

Tom:

Dan, thank you so much again for jumping on and thank you everybody for listening to The Remote Real Estate Investor. If you enjoyed this episode, enjoyed the podcast. we'd love it if you would subscribe and give us a review. All right. Happy investing.

Michael:

Happy investing.

In this episode, Tom, Michael & Emil answer questions from our last webinar. 

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Transcript 

Tom:

Greetings, and welcome to the remote real estate investor. My name is Tom Schneider, and I'm joined by

Michael:

Michael Albaum

Emil:

And Emil Shour.

Tom:

On today's episode, we are going to be addressing questions we recently received in a webinar. We got so many great questions within the webinar. So we decided, let's roll that right into the AMA, or an ask us anything? So today, we're gonna be going from the wonderful questions that we got. So here we go.

Theme Song

Tom:

Before we get going into it, Emil and Michael, what is going on?

Emil:

I have some exciting news. I got under contract for a three unit property last week. So nice. Yeah, it's been a while since got something under contract. And moving forward. We actually had actually, we had another three unit in contract right before it, but we needed to because there were like no marketing photos. So we had to have a signed contract to even look at it got in there. It was a total mess, tried to negotiate with the seller, and he wasn't willing to go lower. So we got out of that one quickly. But this one's looking much better. And we are, we got inspections coming up this week. So moving forward.

Tom:

What a horrible like that seller making you get into contract before showing you anything What a waste of everybody's time is he like just trying to pull a fast one like that's.

Emil:

I get it in that like, Okay, if you have, you know, multifamily, and there's tenants, they don't want people coming in just like disturbing tenants and being looky loos, but to not have any pictures or any type of like real information for the buyer. It's basically just like, submit an offer. And what's behind door number three, right? Like, that sucks. So

Tom:

Well, congratulations, man. Awesome. That's great.

Emil:

Thank you. Yeah, so inspections go and everything like that, but excited to hopefully be picking on my first small multifamily.

Michael:

Right on man. Super cool. Yeah. So I just got off the phone. That's why I was a little bit late to this recording here. I just got off the phone with both the city and county out in Kentucky around a couple of properties. I never received my tax bill for I get a city bill and then a county bill. And I never received either of them. But I had for other properties in the area. So I was like, hmm, something's going on here. Let's see what's going on here. So I called the city and I was like, Hey, I never received my tax bill. And they go, Oh, that's because it was requested by this company that I never heard of. And I was like, well, that's weird. Why like so I just don't get one. They said no, it goes to their maybe your lender will pay your impound account or your escrow. You pay your property taxes.

I was like, that doesn't sound right. So I called my lender and I was like, hey, do you guys pay account for this property taxes? And they go, No. I said, huh. So I called this company. I was like, hey, what the hell guys like, You're the reason I didn't get a copy of my property taxes, like, What's the number? What's the parcel ID? And I told him, they said, and who's the lender? And I told him to go, that's not who we have on our end. I was like, wait, okay, so wait a minute, let me get this straight. So you input an error, the county and a parcel number, and now requested my property taxes for this property, which is why I never received them, meaning my property taxes are going to get paid late this year. And they go oh, well, I mean, maybe I can you send me something that says, We are this company and this is what we've requested? An they were like Oh, no, for privacy reasons we can't, you've got to be kidding me. So every word to the wise out there know what your property tax bills come out knowing they're due and keep an eye out for him because you can totally just get shafted by companies for no wrongdoing of your own. So I'm going to be having another strong follow up conversation with that company.

Tom:

So a pro tip here related to dates is within your Google calendar or whatever. calendaring systems you use, create a new calendar, label it rental properties, and then add in any relevant date. So an example would be the lease end date. Perhaps you can put a reminder 90 days in advance, you can poke your property manager to say, Hey, what are you thinking about renewals, adding your taxes due dates, specifically, if you do not have those taxes impounded with your lender, if they are impounded, your lender is just going to manage it and pay them. Ooh, another date is you can actually appeal the tax value of your property. So if you want to try to lower your property taxes, there are deadlines based on the county on when you can submit an appeal to lower our taxes. Let's do an episode on that, guys. I've been meaning to research a little bit more and the best way to learn about is to talk about it and get into it. So anyways, protip adding a calendar, having your lease end date, taxes due date, and that good stuff.

Michael:

Yep. super great point.

Emil:

Michael. Doesn't the county usually have your address as like the address to send property taxes? So what even if someone else, like requested it? It's so weird that the city doesn't just like default, also sending it to the address on file or whatever?

Michael:

Yes, yes, I am so frustrated. And so confused.

Emil:

Makes no sense.

Michael:

I have no idea why they just wouldn't send two records like oh one to the owner and one to this other random person that I've never spoken to before that has no like, no claim to this property, but we'll send it to them and not the owner.

Emil:

Right? Like they've been confirmed like, Are you a member of this LLC or whatever, whoever's the owner?

Michael:

No at all. No.

Emil:

That's funny.

Michael:

It seems a little too loosey goosey for me.

Emil:

What city is this?

Michael:

This is in Covington, Kentucky.

Emil:

Shout out Covington. You guys are doing really well out there.

Michael:

Just putting the entire city on blast.

Emil:

I'm kidding. I'm kidding. Just, you know, sometimes local governments can be interesting.

Michael:

Yeah. Yeah.

Tom:

My update today is my closing date for refinancing on my personal house. So crazy rates. So I did this through loan depot, which I'd never heard of before, which, to be honest, sounds a little bit like interesting, you know, loan depot. But anyways, like 2.85%, like crazy low rates. So as it relates to real estate investing, finishing this refinance, then pulling out a HELOC to have that nice delta between the value of my house and the loan amount. And that will provide me some some buying power to get after it to build, build, build.

Michael:

Did you have to buy down that rate, Tom, or that was that which is what they were offering?

Tom:

No. And I'm glad you asked that question. I'm about to say they initially had some points. And I listened to the little Michael Albaum on my shoulder and a little Michael Albaum, my shoulder said, Hey, Tom, you should ask for them to not charge you that. Why not ask nothing to lose, ask? Right? Just as Michael Albaum would say. So I did that. And they took they took, like 2000 bucks off my closing costs, like 2,000 bucks off my closing.

Emil:

What fee was that?  

Tom:

It was like a couple of points.

Emil:

You just said can you not charge me points but give me the same rate? And they're like, sure.

Tom:

Yeah, yeah, pretty much you know what I dangled in front of them. It's like hey, you know, I have this a bunch of rental properties that I may refinance to, you know, I perhaps we could do some stuff later, which I probably will I mean, if they're like having such crazy rates, and they're able to have a lot of leeway with regards to taking away these extra payments, so yeah, just ask for it. And you cannot get it. Don't ask for it. So yeah, it's got like a couple thousand bucks off my quote.

Michael:

Good for you.

Tom:

Thanks, Michael. on my shoulder and the real Michael,

Michael:

No problem. I only charge at a 10% Commission. So when should I expect to see my check? I’m reasonable.

Tom:

That's right, you know, yeah.

Michael:

That's super exciting, man. Good for you.

Tom:

Yes.

Emil:

I want a HELOC so bad. I need our house to appreciate a little more.

Michael:

Tom, where are you getting your HELOC through also through loan depot?

Tom:

I'm planning to do it through 3rd Federal and they have you know, just crazy rates too. I think they're like two and a half we had an open and then we had to close it for the refi right so now we're gonna open it up again. And 3rd Federal, it's my wife's name is on the HELOC because they don't like people that own a bunch of they have a bunch of loans on their name. So just going through that this rigmarole right now. So as soon as this free five closed and will reopen a HELOC my wife's name and then onward and upward.

Michael:

And what LTV will they give you on the he lock up to? Do you know?

Tom:

Yeah, they'll give up to 80% Okay, but you know, we recently did some we added a bathroom, so I'm hoping we can get a good good jump and what they value the property at which would be pretty cool.

Michael:

So did you have to get a new appraisal done for this refi?

Tom:

No, they just like looked at their computer. And with refinances lenders are way more, less strict around sending an actual appraisal of the property. So if they just did a desktop appraisal and then came to the value, and again, no problem. And I assume it'll be similar for the HELOC the way that they do the appraisal. But on your question on percentage on what the HELOC went up to another lock provider that I was looking at is the it's like the San Francisco fire credit union, San Francisco for anyways, they go up to 90%. So their rates were a little bit higher, and I didn't necessarily need that extra pop of equity to take out. So I was okay with less of lower credit line and doing it through,

Michael:

Because you're making 100,000 passive already.

Tom:

Tom:

There you go. Yep, there you go. There you go.

Michael:

That's awesome. And so is the rate fixed as an introductory rate or is it it's floating fluctuating?

Tom:

The refi is fixed 30. Man, it'd be so interesting to see what happens with rates, you know, in the next six months or four months, it sounds like they're gonna stay low. But with the HElOC it's going to move around based on what the rate is and…

Michael:

The lightboard plus a spread or whatever,

Tom:

I think it's reasonable to assume that it's going to stay pretty consistent, at least as the economy kind of chugs through the pandemic, that they're not going to be, you know, increasing that too much so but you never know, got to have good reserves. Gotta be mindful of your loan to value ratio and being able to service for that. But yeah, excited about it, though. So it's taken a little bit of time to get that done, but onward and upward. Alright guys, shall we get into the questions we got?

Michael:

Totally

Tom:

First question. We have, what is portfolio levered? And, and I think this question is really speaking to, you know, the concept of being levered and, Michael, do you want to speak to portfolio levered income?

Michael:

Sure. So portfolio levered income. There's a bunch of different terms that get thrown around in the real estate space, I think to make the industry sound more complicated or sound fancier than it is. And I think most people are able to wrap their head around what portfolio income is just how much income is a specific portfolio generating, but the term levered in here kind of throws people for a loop. And what that really means is levered is just talking about the use of leverage, or debt, or a mortgage, all three of those words are synonymous. And so if someone has an 80% mortgage on their property, they put 20% down, they now have being detracted from the income, a mortgage to pay on a monthly even annual basis.

So the income they're gonna be generating on that property is going to be from $1 amount perspective, less than if they didn't have a mortgage. So portfolio leveraged income is just Hey, we have a portfolio, we have a single property, it has a mortgage on it, it has debt on it, how much income is that property, or that portfolio making? That's all portfolio leveraged income says. And so as again, as we scale properties from one to two, three to four to five, and now we have a portfolio, we're looking at the global portfolio, the summation of all properties together that all have mortgages and all of their incomes, how much revenue how much income? Are there? Is that throwing up?

Tom:

Awesome. Another lending related question, as far as lending goes, is there a minimum you have to borrow to obtain a loan, don't you generally get a better rate, when you borrow more money, I can take a first stab at this one. So, many lenders will not loan below a certain dollar amount. And the reason for that is just the the amount of work isn't necessarily worth it, what I've seen is a common line in the sand with at least some of the larger lenders is if the size of the loan is below $70,000, or $65,000, it's not worth their time, I'm positive, there are private lenders that will do much smaller types of loans. But generally speaking, the larger lenders put that line in the sand around 60, or $70,000, of the size of the loan. So if you're buying a property for $90,000, just multiply point eight, that's the loan to value ratio that you're trying to get.

And on the question is don't you get generally get a better rate when borrowing more money, that's not necessarily true, you'll get a better rate, if you actually if your LTV if the amount your down payment is larger. So if I'm buying a house, and I'm paying 50% of it with my own as a down payment, and then 50% of the debt, you're going to get a better rate with that type of a down payment versus if you're only putting down 20%. In my experience, it's not necessarily the size of the loan, but the ratio of the amount of money that you're putting in relative to what the bank is putting in in the form of a loan.

Michael:

Although I will say just to kind of pepper this in and piggyback off that in the commercial world, that can often be true. So commercial residential real estate is five units. And up as soon as you get above the million dollar threshold in terms of borrowing, you have a lot more power as a borrower, you also have access to other products that aren't available in the traditional world. Everyone's probably heard of Fannie Mae and Freddie Mac, as kind of the mortgage backed securities industry, they also lend on what's called Small balance loans. And those are anywhere between I think, 750, they can go as low as 750. But typically, they're a million up to 5 million, and you get to some amazing, amazing rates in that space. So definitely something to think about if you're going commercial. But as far as residential, I think I would agree with you, Tom, that the dollar amount doesn't really matter, you get into what's called jumbo loans above a certain threshold.

Tom:

Good point, good point

Michael:

And the rates can change a little bit there. So just kind of keep that in mind.

Emil:

While you guys were chatting, I looked it up in the background. So jumbo loans, as of 2020, start at $510,400 for a single family home in most areas of the country. And they are the rates are usually a little bit higher. Once you get into jumbo, I experienced that on our on our personal residence when we did a refi. So the rate goes up a little bit. It's not like it's not drastic, but it does go up a little bit. And then I think when you go above a million it goes up again, is what I think I remember hearing or reading.

Tom:

The upside down world of residential versus commercial lending. Just as a heads up, my computer's about to die and I don't have power here. So if I run out guys, continue to power through without me. Go on without me!

Emil:

Okay, no worries, save yourselves.

Michael:

The next question we have is can I refi a property and use those proceeds in a 1031 to pay off the mortgage of another property. So the good news is about refinancing a property is that that cash you get out of that process is actually tax free. And so you can absolutely use those proceeds to pay off another property, you can go buy another property, you can really do whatever you want with those proceeds, they're yours to use in cash. And so a 1031 isn't necessary when you do a refinance. Again, because That money is already tax free. So a temporary one wouldn't get you any benefit. Additionally, 1030 ones are typically reserved for selling a property and then buying a new property. And in the case of refinance, you're actually not selling any property, you're just tapping into some of the equity. So hopefully that answers that question. Emil do you want jump on the next one?

Emil:

Alright, so next question, how do you finance so many, if you're only able to take out a max of 10, conventional Freddie, or Fannie Mae mortgages, so government back mortgages, Fannie, Freddie, you're allowed to take out 10 in your personal name. And that is where they cap out. I think if you're married, your spouse can take out an additional 10 in their name, that's one creative way people get around the 10 limits. But then once you're tapped out, you personally or you and your spouse, you basically have to move on to either private money, hard money, or commercial loans, like Michael was recently talking about.

So private money is private, it's friends and family, it's different investors, people who want to invest with you, you know, you can do interest only type loans, you can do something like what Michael Zuber on previous episodes has talked about, where he gives people some equity in some interest, you can just set it up however, you feel. Hard money is typically correct me if I'm wrong, it's not going to be long term, right? It's usually like 12 months, maybe up a little bit more, but it's not like long term debt that you can take out on a property.

Michael:

I don't know if we can save that all hard money lenders won't lend long term. I think most people don't use it long term, because it's so expensive. Yeah, I mean, if I was a hard money lender, I would love to have someone use it long term, because that's one deal. I don't have to keep moving that money around. So I think most people use it for the short term. And in the interim, I don't know what every, you know, loan agreement actually says from every hard money lender that's gonna be lender specific.

Emil:

In most situations, hard money is better for short term either fix and flip or different type of projects where you need a bridge loan for a short period of time. Otherwise, you'd probably just go to a commercial lender and get a loan that way where they are, instead of just evaluating you, like you do with your Freddie Fannie loans there, they are evaluating the asset as well as you personally. And in some cases, just the asset.

Michael:

There are also private lenders above and beyond just friends and family. There are companies that do this that are backed by investors, so I was just chatting with one the other day, their rates are going to be higher than the Fannie Freddie type stuff. But there are much easier, more flexible lender, you don't have to jump through all the rigmarole typically for the qualification process. So it can be a really great way to go. And then I found just most people that I worked with that time you get to 10 properties or before you get 10 property, you could get properties eight or nine, you're going to be doing either a different kind of deal or structuring things a little bit differently. You could also look at wrapping multiple properties under a single note, depending on if you can work with a lender that'll do that under a single portfolio. And that'll technically be a commercial product. But that's a way to erase or get back whatever those Fannie Freddie mortgages you have outstanding.

Emil:

And if you guys want a little bit more background and info, we did an episode on private lending, it was Episode 30, called how private money lenders can help you close more deals in less time. So if you guys want to learn more about private money, great episode to check out. One last thing I want to just make a quick clarification of here. So those 10, Fannie Freddie loans, those are only on single family, which most people when they hear single family just think of single family home, but it's actually one to four unit properties. So any of those properties are you can get a Fannie Freddie loan for, and that's what the up to 10, qualifies for.

Michael:

Sweets. Another question we got is some properties that were sold for less than 20,000, a year ago are now available for 100,000 on Roofstock, this still makes sense to buy those properties. So that might have been part of a portfolio. And so if someone's buying a portfolio, and then chopping it up after the fact, on the purchase side, they'll likely get a better deal because it makes it easier for the buyer and seller to just do one transaction things are less expensive things move faster. And so if they were bought as a portfolio, and then we have work was done, and then now they're being sold as individual properties. Yeah, I can absolutely make sense.

So I'm often more concerned about how does the property perform today? What are the numbers look like today? What are the comps look like today, just because somebody got a great deal a year ago or a screaming deal a year ago or two years ago when they bought the property doesn't mean that I can't also get a great deal, even if I've got to pay more money for it. I've talked about this a number of different episodes. I bought a 5-plex from a guy who picked it up for just a song like four or five years prior. And so if we looked at what he paid for it versus what I paid for it, yeah, I paid way more for it than he did. But he got a great deal. He got screaming, yelling He bought it, I found a really good deal when I bought it. And so the numbers made sense. And I wasn't really going to compare myself to him. The previous buyers said, Does this make sense for me? And my goals? Yes, it does. Okay, great. I'm happy to pay what the asking price is or what the ultimate price was.

Emil:

The other thing that might be happening there is let's say someone bought it for 20 K a year ago, they they may be also or flipper fixing flipper, right so they bought it and just absolutely terrible condition and then put in a bunch of capital expenditure to fix it up, right, maybe you own new floors, new paint, new appliances, new HVAC new roof. So they were they're making their money is on sale, where as you as a buy and hold investor, you're making it on the cash flow or equity and the total return over time, right. So they're playing a different game where it's just shorter term, and that's how they make their money is whatever they buy it for. And then they fix it up, and then that delta from sale price, so they put in the sweat equity, that could be another reason why they were able to buy it so low

Michael:

Good points.

Emil:

Alright, so this is a great question. What are some of the assumptions you're using for maintenance and repair expenses? Michael,

Michael:

There's not gonna be any maintenance and repair.

Emil:

Yeah, there is none. Right?

Michael:

You’re Buying a turn key property.

Emil:

So Michael, this is this is one that you kind of changed the way I looked at it. I used to, like most people, and most calculators take maintenance and repairs as a percentage of rent. When if you really think about it, fixing the toilet, fixing a broken refrigerator, whatever it is, they cost what they cost, they're not a percentage of the rent, right? Whether it's a two bed, one bath house, yes, you may have more expenses and maintenance in a bigger house than a smaller one. But still a lot of things that need to be repaired, they cost the same amount. So instead of using percentages, I have converted over to just a fixed amount per unit. So for single family, what I use for maintenance repairs is $75 a month is the flat amount. And that's probably pretty, I would say pretty conservative. I don't think a lot of people use that amount. But I like to when I'm evaluating properties really look at like my worst case, I don't want to paint a super rosy picture and say if everything goes right, this is what it's gonna look like. I'd rather say, okay, we're having not a great year. What is this thing perform that now?

Michael:

I think I think you nailed it. No, I concur. 150%, I think using a percentage of the income, like you said is the wrong way to go about it. Because there are just minimum expenses associated with a property, whether it's a four to like you mentioned or to one, a fridge is a fridge, a roof is a roof. And of course, there's going to be differences in labor and material costs in different parts of the country. But you take a small house in a market and a small house in that same market to repair the roof is still going to be whatever, 50 bucks a square foot or what have you. And so there are just expenses associated with owning a physical property that independent of the rental amount needs to be paid for and accounted for.

So I'm the same I like 75 to 100 bucks a month depending on where the property is geographically located in harsher climates up that number. And for bigger properties up that number to be on towards the higher end of the spectrum have the hundred dollar range. But I think between for most single family home 75 200 bucks a month, I get you there, as long as things are in pretty good working order to begin with. If it's falling apart, well, yeah, that number is going to be higher, and it's going to be death by 1000 cuts. But if the property can sustain itself, great, not that doesn't need to be a problem.

Emil:

And we're talking about just repairing maintenance, right? Like you have a separate line item for capex reserves.

Michael:

Correct? Correct.

Emil:

Yep, same. The difference is capex reserves. You'll hear us in different real estate investors talking about setting aside reserves for when you have these big things like the roof, like the water heater goes out, each vac needs to be replaced, right? If you're buying a completed turnkey property where a lot of these things were recently rehab, you may not need to put aside as much in reserves. But it's always good to just factor these things in because if you're planning on holding for the long run, they're going to need to be replaced in whatever, 15 years instead of two years.

Michael:

At some point.

Emil:

Yeah, exactly.

Michael:

Alright, so moving on. So the next question is one that I love. So is it possible to make a full cash offer to get a discount over the asking price, and then refi afterwards to get leverage for the next deal. So I love this strategy. I tell it all the time. It's an amazing, amazing thing to do. If you're able to make all cash offers and all cash purchases, in a lot of these markets around the country, all cash carries a lot of weight. And so if you can make an all cash offer, you can often beat down the purchase price, which can often have positive implications for your property tax rates as well. And so if you can get the property for a discount, great, then you can go refi it and get 80% of your cash out and go on to the next deal.

Now a couple things to keep in mind is you definitely want to be well aware of what the lender that you're going to do the refi with is going to require both in terms of you personally as a borrower, what kind of documentation do they need any paycheck stubs, tax returns, all that kind of good stuff. And then how long do you have to own the property before you can do this refi The last thing that I would ask is how long you need to on the property before they will give you a new appraisal or are they going to give you the purchase price. So the differences. If you buy a property for, let's say it's worth 100 grand, you buy it for 80, you go through your cash out refinance, say six months is the lender going to give you 80% of the purchase price at 80 grand, or are they going to give you 80% of the appraised value, which is hopefully 100, maybe even north of 100.

Because the difference between the two is you might end up with all of your money back, if they're going to give you on based on the appraisal, because the property is worth 100, that you bought it for 80. So they're going to give you that full 80 grand back, which means you just bought that property for zero money out of pocket, or they're going to give you 80% of the purchase price of the ADK. Which would be what is it like 65 grand, I think, so you'd still leave some money in the deal. So people talk about BRRRR strategies all the time, which is buy rehab, rent, refinance repeats, in theory, there's a way where you can do that, without ever having to do the rehab part of the middle arc, you can get a good enough deal with an all cash purchase. So something to be thinking about. But again, it's really, really important to have the conversation on the front end, prior to purchasing the property about what the lending side looks like after the fact. And also, as you're running your numbers, make sure you you understand it with cash purchase, what are your dollars doing for you. And then also on the financed purchase. Okay, after you pull off, you have to put debt on this property, how does that property perform? Can it still sustain itself? And is it still cashflow? depending on what your goals are, that may or may not be important to you.

Emil:

Solid. Great advice. Only thing I want to add here is I think it also depends on the environment you're in. I think a lot of times you'll think, Oh, just because I'm giving an all cash offer, for sure go out and get a discount, right. And let's say you're going for a turnkey property and you you go put an all cash way under asking I mean, you can you can always put out offers, there's no harm in putting on offers, right? We talked about it free, go for it. But a lot of times, you're not going to win those, right. And especially in an environment like this where interest rates are very low, it's very easy for people to get financing right now, it's a little bit tougher unless the property is almost in that state where a bank won't even finance on it, right? It needs to be major rehab or something like that. It's going to be even harder to win with a with an all cash offer just something I've seen personally in trying to go and throw out cash offers to get discounts. It's not saying not possible, but just also factor in the environment you're in, in terms of your expectations.

Michael:

Totally. I was looking at a house hack a couple years ago in the Bay Area, California. And I was looking to make offers on properties. And I was getting laughed out of the room because I wasn't bringing 10% over asking and all cash. It's like all cash was the bare minimum just to even be considered. And then you've got to be above asking. So it's really important to kind of know your audience their demographic and also under try to understand if you can with the sellers motivation is if you're doing deals on RooFstock, that's a bit harder. But if you're doing deals off rootstock, go talk to your agents, hey, go find out why this person is selling. Oh, because they're in the middle of divorce. They need quick cash. Okay, well, all cash might play better than, oh, they just rehab the property. They're trying to sell it and get top dollar. Well, they might be waiting and holding out for the best offer and you're all cash offer might not be as strong as you might think it is. So understand the environment, understand and know your audience if you can.

Emil:

Awesome. All right. Next question I want to take is, this is a good one I've been thinking about a lot lately. Is it common for renovations to be required when buying a property? And if so, how do you factor that into your model? I like this question a lot. Because I think a lot of us are trained to say I have to get a deal. Right a deal. I have to get it under a certain amount. So I can walk in with some equity. Obviously, that's what we all want. Obviously, that makes a lot of sense. Right? buy the property get it for a good price. Totally. Let's say you buy 100K purchase price. Yeah. And you're putting 20% down, right, right. So you put in 20 k Yeah, plus closing costs. We'll just make it 20 k for ease of example here. And then you walk in, you realize you have to put 20 grand in renovations to be able to rent it out, right? So you're 40 k out of pocket on this property, and you do your cash on cash, you look at your different returns and you're looking at your return it's going to be let's call it 7% because you had to put 40 k down, versus maybe there's another property that was 120 K, and it's turnkey.

And so you only have to put 24 k down and it's already at market rent. And so now because you had to come out of pocket so much less your return is typically not always you have to run the numbers, but your turn can be higher, because right now your denominator in the cash on cash formula, right is 24 k versus 40 K. So one important thing to really consider is yes, you may be getting a deal but your cash on cash return may not be as good because you have to factor in all these renovations into your cash out of pocket. That makes sense.

Michael:

It makes total sense. I mean, not only cash out of pocket but also time and headache. So construction always is on time and always under budget right always. So the time there's holding costs associated with Doing renovations, there's physical time that it takes to do the turns to do the rehab, do the renovation, which all needs to be considered. And if you've got a single family property, you're probably not collecting rent for that time period. And so you could be negative cash flow for several months before you end up seeing anything. So again, we need to be kind of long term greedy here and look at the full picture about Hey, is this actually worth it doesn't actually make sense? And can I afford to float all of these expenses, if in your example, Emil, you know, you vote, buy the property for 20 grand, and you're going to put 20 into it, but all you have is 20 in reserves and the rehab is going to cost you the full 20, you might not be able to afford that rehab.

Because all the while it's going to take two months, you're going to have property taxes, insurance costs, utility costs, mortgage costs, that all don't stop just because you're rehabbing a property. So again, just make sure you're getting the full, full, full picture, when determining what your actual cost is, then out of both on the time horizon and on the cost.

Emil:

Yep. And again, this isn't to say, don't go buy homes that could potentially need renovation, there's a lot to be said there, it's just don't take it for face value that you got to buy something well under market value, quote unquote, but not realizing that you're gonna have to put way more cash out of pocket as well. So your return may not look as well look as good. So just make sure you compare those things and and look at them side by side.

Michael:

Great point. Is right now good time to buy a rental considering today's uncertainties. This is a great question. So yeah, I think if the numbers do the talking for you, there's a lot less uncertainty in the equation, so to speak. So you know, I bought properties in high, hot markets, in cold markets and everything in between. And all the while the numbers have been the talking. And I mean, the numbers and the property, but also the numbers in the greater market. So you need to go get a handle on what's going on in that particular market that you're interested in investing in. And in that particular sub market, and talk to property managers talk to agents or contractors talk to as many people as you can, in that area to try to get as best a finger on the pulse as you can.

Because a lot of times what happens on national news isn't the same that's occurring at the local level. And so when we hear about mass unemployment and mass layoffs, and all this kind of thing, well, yes, that's happening at the national level, the local picture might look very different. And so getting a handle on what's going on at the micro level is hyper critical. So I remember we did a podcast and you know, with our, one of our property management partners out in Alabama, and they were saying that, oh, they're at 98% occupancy, and they've never been at 98%, occupancy, and physical and economic occupancy. So 90% occupancy, with brick with tenants that are paying.

So if that local market, things have seemed to be maybe even stronger, as a result of the last several months, or at least unchanged for the negative. So again, I think taking the global topic, the global picture, and kind of laser focusing in and zooming into the micro level and understanding, Okay, I understand what's going on nationally, but I really need to understand what's going on hyper locally. And that's how I'm going to make my decisions. Because again, in oh nine, we saw massive price drops and roller coasters on the coasts, the middle America was a lot more insulated. And so again, nationally, they were the The news was talking about all this crazy stuff, but we need to again, understand what's going on at the local level, to really get an understanding of how much uncertainty is there really.

Emil:

Yep. The other thing I always like to point out here is that if you're like us, and you're planning on holding for a 20 to 30 year time horizon, right, even if let's say you buy something, and on paper, the value of it goes down. You gotta remember this is a is a rental property, right? So maybe your net worth in you know, your, your personal finance, tracker, personal capital, whatever you use to track your, your net worth, maybe that takes a hit. But you got to remember, you're not selling the I mean, you may have to who knows what's gonna happen, but that's just on paper, right? If it's a rental property, that thing's still making money every month. So I like to look at these things as I'm on a long time horizon, do I think real estate in 20-30 years is going to be more valuable than it is now are rents going to be higher than they are now?

I believe so. That is why I continue to invest through up and down. And one important caveat, I want to just, you know, say for myself, is I've never invested through a major recession. I started personally in 2017. So I've personally only seen a bull market but I like to listen to people who have been there and done that and one of the big things they always talk about is just make sure conservatively financing that's the big one, right like right now you can't even really go and get a five to 10% loan like they were doing in 06, 03-06 right. So like you have to be 20 25% down but You know, if you're feeling a little uncertain, maybe you maybe go 25 30% that'll help you weather storm so much better. Right? It gives you more of a cushion. So, yeah, besides what Michael mentioned those additional points I'd say there, and it's so hard to have a crystal ball and say what's going to happen, right? Like, I remember in 2018 people were calling 2018 going to be a crash. And then the headlines change to 2019 is going to be a crash. And then 2020 is going to be so every year those headlines are just there and it's really hard for people to predict them but they make for very click baity headlines. And I guess somebody at some point will get to say, see I told you I was right

Michael:

I was right yeah.

Emil:

They just keep moving the goalposts it's not to say it's not gonna happen always happens. They'll see that cycles but I don't know I plan on investing through the ups and downs.

Michael:

Well, thanks so much for listening everybody. That was our show. I hope you enjoyed the AMA or the A ua please continue to send us questions that you have if you'd like to see answered on the podcast. Also, feel free to leave us a rating and review. We have a swag bag giveaway to a couple of folks that help us get to 100 reviews wherever they listen to your podcasts, Apple, Google or Spotify. So feel free to drop us a line there. Let us know how you liking the podcast. We'll catch you on the next one. Happy investing.

Emil:

Happy investing

In this episode, Tom, Michael & Emil answer questions from our last webinar. 

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Transcript 

Tom:

Greetings, and welcome to the remote real estate investor. My name is Tom Schneider, and I'm joined by

Michael:

Michael Albaum

Emil:

And Emil Shour.

Tom:

On today's episode, we are going to be addressing questions we recently received in a webinar. We got so many great questions within the webinar. So we decided, let's roll that right into the AMA, or an ask us anything? So today, we're gonna be going from the wonderful questions that we got. So here we go.

Theme Song

Tom:

Before we get going into it, Emil and Michael, what is going on?

Emil:

I have some exciting news. I got under contract for a three unit property last week. So nice. Yeah, it's been a while since got something under contract. And moving forward. We actually had actually, we had another three unit in contract right before it, but we needed to because there were like no marketing photos. So we had to have a signed contract to even look at it got in there. It was a total mess, tried to negotiate with the seller, and he wasn't willing to go lower. So we got out of that one quickly. But this one's looking much better. And we are, we got inspections coming up this week. So moving forward.

Tom:

What a horrible like that seller making you get into contract before showing you anything What a waste of everybody's time is he like just trying to pull a fast one like that's.

Emil:

I get it in that like, Okay, if you have, you know, multifamily, and there's tenants, they don't want people coming in just like disturbing tenants and being looky loos, but to not have any pictures or any type of like real information for the buyer. It's basically just like, submit an offer. And what's behind door number three, right? Like, that sucks. So

Tom:

Well, congratulations, man. Awesome. That's great.

Emil:

Thank you. Yeah, so inspections go and everything like that, but excited to hopefully be picking on my first small multifamily.

Michael:

Right on man. Super cool. Yeah. So I just got off the phone. That's why I was a little bit late to this recording here. I just got off the phone with both the city and county out in Kentucky around a couple of properties. I never received my tax bill for I get a city bill and then a county bill. And I never received either of them. But I had for other properties in the area. So I was like, hmm, something's going on here. Let's see what's going on here. So I called the city and I was like, Hey, I never received my tax bill. And they go, Oh, that's because it was requested by this company that I never heard of. And I was like, well, that's weird. Why like so I just don't get one. They said no, it goes to their maybe your lender will pay your impound account or your escrow. You pay your property taxes.

I was like, that doesn't sound right. So I called my lender and I was like, hey, do you guys pay account for this property taxes? And they go, No. I said, huh. So I called this company. I was like, hey, what the hell guys like, You're the reason I didn't get a copy of my property taxes, like, What's the number? What's the parcel ID? And I told him, they said, and who's the lender? And I told him to go, that's not who we have on our end. I was like, wait, okay, so wait a minute, let me get this straight. So you input an error, the county and a parcel number, and now requested my property taxes for this property, which is why I never received them, meaning my property taxes are going to get paid late this year. And they go oh, well, I mean, maybe I can you send me something that says, We are this company and this is what we've requested? An they were like Oh, no, for privacy reasons we can't, you've got to be kidding me. So every word to the wise out there know what your property tax bills come out knowing they're due and keep an eye out for him because you can totally just get shafted by companies for no wrongdoing of your own. So I'm going to be having another strong follow up conversation with that company.

Tom:

So a pro tip here related to dates is within your Google calendar or whatever. calendaring systems you use, create a new calendar, label it rental properties, and then add in any relevant date. So an example would be the lease end date. Perhaps you can put a reminder 90 days in advance, you can poke your property manager to say, Hey, what are you thinking about renewals, adding your taxes due dates, specifically, if you do not have those taxes impounded with your lender, if they are impounded, your lender is just going to manage it and pay them. Ooh, another date is you can actually appeal the tax value of your property. So if you want to try to lower your property taxes, there are deadlines based on the county on when you can submit an appeal to lower our taxes. Let's do an episode on that, guys. I've been meaning to research a little bit more and the best way to learn about is to talk about it and get into it. So anyways, protip adding a calendar, having your lease end date, taxes due date, and that good stuff.

Michael:

Yep. super great point.

Emil:

Michael. Doesn't the county usually have your address as like the address to send property taxes? So what even if someone else, like requested it? It's so weird that the city doesn't just like default, also sending it to the address on file or whatever?

Michael:

Yes, yes, I am so frustrated. And so confused.

Emil:

Makes no sense.

Michael:

I have no idea why they just wouldn't send two records like oh one to the owner and one to this other random person that I've never spoken to before that has no like, no claim to this property, but we'll send it to them and not the owner.

Emil:

Right? Like they've been confirmed like, Are you a member of this LLC or whatever, whoever's the owner?

Michael:

No at all. No.

Emil:

That's funny.

Michael:

It seems a little too loosey goosey for me.

Emil:

What city is this?

Michael:

This is in Covington, Kentucky.

Emil:

Shout out Covington. You guys are doing really well out there.

Michael:

Just putting the entire city on blast.

Emil:

I'm kidding. I'm kidding. Just, you know, sometimes local governments can be interesting.

Michael:

Yeah. Yeah.

Tom:

My update today is my closing date for refinancing on my personal house. So crazy rates. So I did this through loan depot, which I'd never heard of before, which, to be honest, sounds a little bit like interesting, you know, loan depot. But anyways, like 2.85%, like crazy low rates. So as it relates to real estate investing, finishing this refinance, then pulling out a HELOC to have that nice delta between the value of my house and the loan amount. And that will provide me some some buying power to get after it to build, build, build.

Michael:

Did you have to buy down that rate, Tom, or that was that which is what they were offering?

Tom:

No. And I'm glad you asked that question. I'm about to say they initially had some points. And I listened to the little Michael Albaum on my shoulder and a little Michael Albaum, my shoulder said, Hey, Tom, you should ask for them to not charge you that. Why not ask nothing to lose, ask? Right? Just as Michael Albaum would say. So I did that. And they took they took, like 2000 bucks off my closing costs, like 2,000 bucks off my closing.

Emil:

What fee was that?  

Tom:

It was like a couple of points.

Emil:

You just said can you not charge me points but give me the same rate? And they're like, sure.

Tom:

Yeah, yeah, pretty much you know what I dangled in front of them. It's like hey, you know, I have this a bunch of rental properties that I may refinance to, you know, I perhaps we could do some stuff later, which I probably will I mean, if they're like having such crazy rates, and they're able to have a lot of leeway with regards to taking away these extra payments, so yeah, just ask for it. And you cannot get it. Don't ask for it. So yeah, it's got like a couple thousand bucks off my quote.

Michael:

Good for you.

Tom:

Thanks, Michael. on my shoulder and the real Michael,

Michael:

No problem. I only charge at a 10% Commission. So when should I expect to see my check? I’m reasonable.

Tom:

That's right, you know, yeah.

Michael:

That's super exciting, man. Good for you.

Tom:

Yes.

Emil:

I want a HELOC so bad. I need our house to appreciate a little more.

Michael:

Tom, where are you getting your HELOC through also through loan depot?

Tom:

I'm planning to do it through 3rd Federal and they have you know, just crazy rates too. I think they're like two and a half we had an open and then we had to close it for the refi right so now we're gonna open it up again. And 3rd Federal, it's my wife's name is on the HELOC because they don't like people that own a bunch of they have a bunch of loans on their name. So just going through that this rigmarole right now. So as soon as this free five closed and will reopen a HELOC my wife's name and then onward and upward.

Michael:

And what LTV will they give you on the he lock up to? Do you know?

Tom:

Yeah, they'll give up to 80% Okay, but you know, we recently did some we added a bathroom, so I'm hoping we can get a good good jump and what they value the property at which would be pretty cool.

Michael:

So did you have to get a new appraisal done for this refi?

Tom:

No, they just like looked at their computer. And with refinances lenders are way more, less strict around sending an actual appraisal of the property. So if they just did a desktop appraisal and then came to the value, and again, no problem. And I assume it'll be similar for the HELOC the way that they do the appraisal. But on your question on percentage on what the HELOC went up to another lock provider that I was looking at is the it's like the San Francisco fire credit union, San Francisco for anyways, they go up to 90%. So their rates were a little bit higher, and I didn't necessarily need that extra pop of equity to take out. So I was okay with less of lower credit line and doing it through,

Michael:

Because you're making 100,000 passive already.

Tom:

Tom:

There you go. Yep, there you go. There you go.

Michael:

That's awesome. And so is the rate fixed as an introductory rate or is it it's floating fluctuating?

Tom:

The refi is fixed 30. Man, it'd be so interesting to see what happens with rates, you know, in the next six months or four months, it sounds like they're gonna stay low. But with the HElOC it's going to move around based on what the rate is and…

Michael:

The lightboard plus a spread or whatever,

Tom:

I think it's reasonable to assume that it's going to stay pretty consistent, at least as the economy kind of chugs through the pandemic, that they're not going to be, you know, increasing that too much so but you never know, got to have good reserves. Gotta be mindful of your loan to value ratio and being able to service for that. But yeah, excited about it, though. So it's taken a little bit of time to get that done, but onward and upward. Alright guys, shall we get into the questions we got?

Michael:

Totally

Tom:

First question. We have, what is portfolio levered? And, and I think this question is really speaking to, you know, the concept of being levered and, Michael, do you want to speak to portfolio levered income?

Michael:

Sure. So portfolio levered income. There's a bunch of different terms that get thrown around in the real estate space, I think to make the industry sound more complicated or sound fancier than it is. And I think most people are able to wrap their head around what portfolio income is just how much income is a specific portfolio generating, but the term levered in here kind of throws people for a loop. And what that really means is levered is just talking about the use of leverage, or debt, or a mortgage, all three of those words are synonymous. And so if someone has an 80% mortgage on their property, they put 20% down, they now have being detracted from the income, a mortgage to pay on a monthly even annual basis.

So the income they're gonna be generating on that property is going to be from $1 amount perspective, less than if they didn't have a mortgage. So portfolio leveraged income is just Hey, we have a portfolio, we have a single property, it has a mortgage on it, it has debt on it, how much income is that property, or that portfolio making? That's all portfolio leveraged income says. And so as again, as we scale properties from one to two, three to four to five, and now we have a portfolio, we're looking at the global portfolio, the summation of all properties together that all have mortgages and all of their incomes, how much revenue how much income? Are there? Is that throwing up?

Tom:

Awesome. Another lending related question, as far as lending goes, is there a minimum you have to borrow to obtain a loan, don't you generally get a better rate, when you borrow more money, I can take a first stab at this one. So, many lenders will not loan below a certain dollar amount. And the reason for that is just the the amount of work isn't necessarily worth it, what I've seen is a common line in the sand with at least some of the larger lenders is if the size of the loan is below $70,000, or $65,000, it's not worth their time, I'm positive, there are private lenders that will do much smaller types of loans. But generally speaking, the larger lenders put that line in the sand around 60, or $70,000, of the size of the loan. So if you're buying a property for $90,000, just multiply point eight, that's the loan to value ratio that you're trying to get.

And on the question is don't you get generally get a better rate when borrowing more money, that's not necessarily true, you'll get a better rate, if you actually if your LTV if the amount your down payment is larger. So if I'm buying a house, and I'm paying 50% of it with my own as a down payment, and then 50% of the debt, you're going to get a better rate with that type of a down payment versus if you're only putting down 20%. In my experience, it's not necessarily the size of the loan, but the ratio of the amount of money that you're putting in relative to what the bank is putting in in the form of a loan.

Michael:

Although I will say just to kind of pepper this in and piggyback off that in the commercial world, that can often be true. So commercial residential real estate is five units. And up as soon as you get above the million dollar threshold in terms of borrowing, you have a lot more power as a borrower, you also have access to other products that aren't available in the traditional world. Everyone's probably heard of Fannie Mae and Freddie Mac, as kind of the mortgage backed securities industry, they also lend on what's called Small balance loans. And those are anywhere between I think, 750, they can go as low as 750. But typically, they're a million up to 5 million, and you get to some amazing, amazing rates in that space. So definitely something to think about if you're going commercial. But as far as residential, I think I would agree with you, Tom, that the dollar amount doesn't really matter, you get into what's called jumbo loans above a certain threshold.

Tom:

Good point, good point

Michael:

And the rates can change a little bit there. So just kind of keep that in mind.

Emil:

While you guys were chatting, I looked it up in the background. So jumbo loans, as of 2020, start at $510,400 for a single family home in most areas of the country. And they are the rates are usually a little bit higher. Once you get into jumbo, I experienced that on our on our personal residence when we did a refi. So the rate goes up a little bit. It's not like it's not drastic, but it does go up a little bit. And then I think when you go above a million it goes up again, is what I think I remember hearing or reading.

Tom:

The upside down world of residential versus commercial lending. Just as a heads up, my computer's about to die and I don't have power here. So if I run out guys, continue to power through without me. Go on without me!

Emil:

Okay, no worries, save yourselves.

Michael:

The next question we have is can I refi a property and use those proceeds in a 1031 to pay off the mortgage of another property. So the good news is about refinancing a property is that that cash you get out of that process is actually tax free. And so you can absolutely use those proceeds to pay off another property, you can go buy another property, you can really do whatever you want with those proceeds, they're yours to use in cash. And so a 1031 isn't necessary when you do a refinance. Again, because That money is already tax free. So a temporary one wouldn't get you any benefit. Additionally, 1030 ones are typically reserved for selling a property and then buying a new property. And in the case of refinance, you're actually not selling any property, you're just tapping into some of the equity. So hopefully that answers that question. Emil do you want jump on the next one?

Emil:

Alright, so next question, how do you finance so many, if you're only able to take out a max of 10, conventional Freddie, or Fannie Mae mortgages, so government back mortgages, Fannie, Freddie, you're allowed to take out 10 in your personal name. And that is where they cap out. I think if you're married, your spouse can take out an additional 10 in their name, that's one creative way people get around the 10 limits. But then once you're tapped out, you personally or you and your spouse, you basically have to move on to either private money, hard money, or commercial loans, like Michael was recently talking about.

So private money is private, it's friends and family, it's different investors, people who want to invest with you, you know, you can do interest only type loans, you can do something like what Michael Zuber on previous episodes has talked about, where he gives people some equity in some interest, you can just set it up however, you feel. Hard money is typically correct me if I'm wrong, it's not going to be long term, right? It's usually like 12 months, maybe up a little bit more, but it's not like long term debt that you can take out on a property.

Michael:

I don't know if we can save that all hard money lenders won't lend long term. I think most people don't use it long term, because it's so expensive. Yeah, I mean, if I was a hard money lender, I would love to have someone use it long term, because that's one deal. I don't have to keep moving that money around. So I think most people use it for the short term. And in the interim, I don't know what every, you know, loan agreement actually says from every hard money lender that's gonna be lender specific.

Emil:

In most situations, hard money is better for short term either fix and flip or different type of projects where you need a bridge loan for a short period of time. Otherwise, you'd probably just go to a commercial lender and get a loan that way where they are, instead of just evaluating you, like you do with your Freddie Fannie loans there, they are evaluating the asset as well as you personally. And in some cases, just the asset.

Michael:

There are also private lenders above and beyond just friends and family. There are companies that do this that are backed by investors, so I was just chatting with one the other day, their rates are going to be higher than the Fannie Freddie type stuff. But there are much easier, more flexible lender, you don't have to jump through all the rigmarole typically for the qualification process. So it can be a really great way to go. And then I found just most people that I worked with that time you get to 10 properties or before you get 10 property, you could get properties eight or nine, you're going to be doing either a different kind of deal or structuring things a little bit differently. You could also look at wrapping multiple properties under a single note, depending on if you can work with a lender that'll do that under a single portfolio. And that'll technically be a commercial product. But that's a way to erase or get back whatever those Fannie Freddie mortgages you have outstanding.

Emil:

And if you guys want a little bit more background and info, we did an episode on private lending, it was Episode 30, called how private money lenders can help you close more deals in less time. So if you guys want to learn more about private money, great episode to check out. One last thing I want to just make a quick clarification of here. So those 10, Fannie Freddie loans, those are only on single family, which most people when they hear single family just think of single family home, but it's actually one to four unit properties. So any of those properties are you can get a Fannie Freddie loan for, and that's what the up to 10, qualifies for.

Michael:

Sweets. Another question we got is some properties that were sold for less than 20,000, a year ago are now available for 100,000 on Roofstock, this still makes sense to buy those properties. So that might have been part of a portfolio. And so if someone's buying a portfolio, and then chopping it up after the fact, on the purchase side, they'll likely get a better deal because it makes it easier for the buyer and seller to just do one transaction things are less expensive things move faster. And so if they were bought as a portfolio, and then we have work was done, and then now they're being sold as individual properties. Yeah, I can absolutely make sense.

So I'm often more concerned about how does the property perform today? What are the numbers look like today? What are the comps look like today, just because somebody got a great deal a year ago or a screaming deal a year ago or two years ago when they bought the property doesn't mean that I can't also get a great deal, even if I've got to pay more money for it. I've talked about this a number of different episodes. I bought a 5-plex from a guy who picked it up for just a song like four or five years prior. And so if we looked at what he paid for it versus what I paid for it, yeah, I paid way more for it than he did. But he got a great deal. He got screaming, yelling He bought it, I found a really good deal when I bought it. And so the numbers made sense. And I wasn't really going to compare myself to him. The previous buyers said, Does this make sense for me? And my goals? Yes, it does. Okay, great. I'm happy to pay what the asking price is or what the ultimate price was.

Emil:

The other thing that might be happening there is let's say someone bought it for 20 K a year ago, they they may be also or flipper fixing flipper, right so they bought it and just absolutely terrible condition and then put in a bunch of capital expenditure to fix it up, right, maybe you own new floors, new paint, new appliances, new HVAC new roof. So they were they're making their money is on sale, where as you as a buy and hold investor, you're making it on the cash flow or equity and the total return over time, right. So they're playing a different game where it's just shorter term, and that's how they make their money is whatever they buy it for. And then they fix it up, and then that delta from sale price, so they put in the sweat equity, that could be another reason why they were able to buy it so low

Michael:

Good points.

Emil:

Alright, so this is a great question. What are some of the assumptions you're using for maintenance and repair expenses? Michael,

Michael:

There's not gonna be any maintenance and repair.

Emil:

Yeah, there is none. Right?

Michael:

You’re Buying a turn key property.

Emil:

So Michael, this is this is one that you kind of changed the way I looked at it. I used to, like most people, and most calculators take maintenance and repairs as a percentage of rent. When if you really think about it, fixing the toilet, fixing a broken refrigerator, whatever it is, they cost what they cost, they're not a percentage of the rent, right? Whether it's a two bed, one bath house, yes, you may have more expenses and maintenance in a bigger house than a smaller one. But still a lot of things that need to be repaired, they cost the same amount. So instead of using percentages, I have converted over to just a fixed amount per unit. So for single family, what I use for maintenance repairs is $75 a month is the flat amount. And that's probably pretty, I would say pretty conservative. I don't think a lot of people use that amount. But I like to when I'm evaluating properties really look at like my worst case, I don't want to paint a super rosy picture and say if everything goes right, this is what it's gonna look like. I'd rather say, okay, we're having not a great year. What is this thing perform that now?

Michael:

I think I think you nailed it. No, I concur. 150%, I think using a percentage of the income, like you said is the wrong way to go about it. Because there are just minimum expenses associated with a property, whether it's a four to like you mentioned or to one, a fridge is a fridge, a roof is a roof. And of course, there's going to be differences in labor and material costs in different parts of the country. But you take a small house in a market and a small house in that same market to repair the roof is still going to be whatever, 50 bucks a square foot or what have you. And so there are just expenses associated with owning a physical property that independent of the rental amount needs to be paid for and accounted for.

So I'm the same I like 75 to 100 bucks a month depending on where the property is geographically located in harsher climates up that number. And for bigger properties up that number to be on towards the higher end of the spectrum have the hundred dollar range. But I think between for most single family home 75 200 bucks a month, I get you there, as long as things are in pretty good working order to begin with. If it's falling apart, well, yeah, that number is going to be higher, and it's going to be death by 1000 cuts. But if the property can sustain itself, great, not that doesn't need to be a problem.

Emil:

And we're talking about just repairing maintenance, right? Like you have a separate line item for capex reserves.

Michael:

Correct? Correct.

Emil:

Yep, same. The difference is capex reserves. You'll hear us in different real estate investors talking about setting aside reserves for when you have these big things like the roof, like the water heater goes out, each vac needs to be replaced, right? If you're buying a completed turnkey property where a lot of these things were recently rehab, you may not need to put aside as much in reserves. But it's always good to just factor these things in because if you're planning on holding for the long run, they're going to need to be replaced in whatever, 15 years instead of two years.

Michael:

At some point.

Emil:

Yeah, exactly.

Michael:

Alright, so moving on. So the next question is one that I love. So is it possible to make a full cash offer to get a discount over the asking price, and then refi afterwards to get leverage for the next deal. So I love this strategy. I tell it all the time. It's an amazing, amazing thing to do. If you're able to make all cash offers and all cash purchases, in a lot of these markets around the country, all cash carries a lot of weight. And so if you can make an all cash offer, you can often beat down the purchase price, which can often have positive implications for your property tax rates as well. And so if you can get the property for a discount, great, then you can go refi it and get 80% of your cash out and go on to the next deal.

Now a couple things to keep in mind is you definitely want to be well aware of what the lender that you're going to do the refi with is going to require both in terms of you personally as a borrower, what kind of documentation do they need any paycheck stubs, tax returns, all that kind of good stuff. And then how long do you have to own the property before you can do this refi The last thing that I would ask is how long you need to on the property before they will give you a new appraisal or are they going to give you the purchase price. So the differences. If you buy a property for, let's say it's worth 100 grand, you buy it for 80, you go through your cash out refinance, say six months is the lender going to give you 80% of the purchase price at 80 grand, or are they going to give you 80% of the appraised value, which is hopefully 100, maybe even north of 100.

Because the difference between the two is you might end up with all of your money back, if they're going to give you on based on the appraisal, because the property is worth 100, that you bought it for 80. So they're going to give you that full 80 grand back, which means you just bought that property for zero money out of pocket, or they're going to give you 80% of the purchase price of the ADK. Which would be what is it like 65 grand, I think, so you'd still leave some money in the deal. So people talk about BRRRR strategies all the time, which is buy rehab, rent, refinance repeats, in theory, there's a way where you can do that, without ever having to do the rehab part of the middle arc, you can get a good enough deal with an all cash purchase. So something to be thinking about. But again, it's really, really important to have the conversation on the front end, prior to purchasing the property about what the lending side looks like after the fact. And also, as you're running your numbers, make sure you you understand it with cash purchase, what are your dollars doing for you. And then also on the financed purchase. Okay, after you pull off, you have to put debt on this property, how does that property perform? Can it still sustain itself? And is it still cashflow? depending on what your goals are, that may or may not be important to you.

Emil:

Solid. Great advice. Only thing I want to add here is I think it also depends on the environment you're in. I think a lot of times you'll think, Oh, just because I'm giving an all cash offer, for sure go out and get a discount, right. And let's say you're going for a turnkey property and you you go put an all cash way under asking I mean, you can you can always put out offers, there's no harm in putting on offers, right? We talked about it free, go for it. But a lot of times, you're not going to win those, right. And especially in an environment like this where interest rates are very low, it's very easy for people to get financing right now, it's a little bit tougher unless the property is almost in that state where a bank won't even finance on it, right? It needs to be major rehab or something like that. It's going to be even harder to win with a with an all cash offer just something I've seen personally in trying to go and throw out cash offers to get discounts. It's not saying not possible, but just also factor in the environment you're in, in terms of your expectations.

Michael:

Totally. I was looking at a house hack a couple years ago in the Bay Area, California. And I was looking to make offers on properties. And I was getting laughed out of the room because I wasn't bringing 10% over asking and all cash. It's like all cash was the bare minimum just to even be considered. And then you've got to be above asking. So it's really important to kind of know your audience their demographic and also under try to understand if you can with the sellers motivation is if you're doing deals on RooFstock, that's a bit harder. But if you're doing deals off rootstock, go talk to your agents, hey, go find out why this person is selling. Oh, because they're in the middle of divorce. They need quick cash. Okay, well, all cash might play better than, oh, they just rehab the property. They're trying to sell it and get top dollar. Well, they might be waiting and holding out for the best offer and you're all cash offer might not be as strong as you might think it is. So understand the environment, understand and know your audience if you can.

Emil:

Awesome. All right. Next question I want to take is, this is a good one I've been thinking about a lot lately. Is it common for renovations to be required when buying a property? And if so, how do you factor that into your model? I like this question a lot. Because I think a lot of us are trained to say I have to get a deal. Right a deal. I have to get it under a certain amount. So I can walk in with some equity. Obviously, that's what we all want. Obviously, that makes a lot of sense. Right? buy the property get it for a good price. Totally. Let's say you buy 100K purchase price. Yeah. And you're putting 20% down, right, right. So you put in 20 k Yeah, plus closing costs. We'll just make it 20 k for ease of example here. And then you walk in, you realize you have to put 20 grand in renovations to be able to rent it out, right? So you're 40 k out of pocket on this property, and you do your cash on cash, you look at your different returns and you're looking at your return it's going to be let's call it 7% because you had to put 40 k down, versus maybe there's another property that was 120 K, and it's turnkey.

And so you only have to put 24 k down and it's already at market rent. And so now because you had to come out of pocket so much less your return is typically not always you have to run the numbers, but your turn can be higher, because right now your denominator in the cash on cash formula, right is 24 k versus 40 K. So one important thing to really consider is yes, you may be getting a deal but your cash on cash return may not be as good because you have to factor in all these renovations into your cash out of pocket. That makes sense.

Michael:

It makes total sense. I mean, not only cash out of pocket but also time and headache. So construction always is on time and always under budget right always. So the time there's holding costs associated with Doing renovations, there's physical time that it takes to do the turns to do the rehab, do the renovation, which all needs to be considered. And if you've got a single family property, you're probably not collecting rent for that time period. And so you could be negative cash flow for several months before you end up seeing anything. So again, we need to be kind of long term greedy here and look at the full picture about Hey, is this actually worth it doesn't actually make sense? And can I afford to float all of these expenses, if in your example, Emil, you know, you vote, buy the property for 20 grand, and you're going to put 20 into it, but all you have is 20 in reserves and the rehab is going to cost you the full 20, you might not be able to afford that rehab.

Because all the while it's going to take two months, you're going to have property taxes, insurance costs, utility costs, mortgage costs, that all don't stop just because you're rehabbing a property. So again, just make sure you're getting the full, full, full picture, when determining what your actual cost is, then out of both on the time horizon and on the cost.

Emil:

Yep. And again, this isn't to say, don't go buy homes that could potentially need renovation, there's a lot to be said there, it's just don't take it for face value that you got to buy something well under market value, quote unquote, but not realizing that you're gonna have to put way more cash out of pocket as well. So your return may not look as well look as good. So just make sure you compare those things and and look at them side by side.

Michael:

Great point. Is right now good time to buy a rental considering today's uncertainties. This is a great question. So yeah, I think if the numbers do the talking for you, there's a lot less uncertainty in the equation, so to speak. So you know, I bought properties in high, hot markets, in cold markets and everything in between. And all the while the numbers have been the talking. And I mean, the numbers and the property, but also the numbers in the greater market. So you need to go get a handle on what's going on in that particular market that you're interested in investing in. And in that particular sub market, and talk to property managers talk to agents or contractors talk to as many people as you can, in that area to try to get as best a finger on the pulse as you can.

Because a lot of times what happens on national news isn't the same that's occurring at the local level. And so when we hear about mass unemployment and mass layoffs, and all this kind of thing, well, yes, that's happening at the national level, the local picture might look very different. And so getting a handle on what's going on at the micro level is hyper critical. So I remember we did a podcast and you know, with our, one of our property management partners out in Alabama, and they were saying that, oh, they're at 98% occupancy, and they've never been at 98%, occupancy, and physical and economic occupancy. So 90% occupancy, with brick with tenants that are paying.

So if that local market, things have seemed to be maybe even stronger, as a result of the last several months, or at least unchanged for the negative. So again, I think taking the global topic, the global picture, and kind of laser focusing in and zooming into the micro level and understanding, Okay, I understand what's going on nationally, but I really need to understand what's going on hyper locally. And that's how I'm going to make my decisions. Because again, in oh nine, we saw massive price drops and roller coasters on the coasts, the middle America was a lot more insulated. And so again, nationally, they were the The news was talking about all this crazy stuff, but we need to again, understand what's going on at the local level, to really get an understanding of how much uncertainty is there really.

Emil:

Yep. The other thing I always like to point out here is that if you're like us, and you're planning on holding for a 20 to 30 year time horizon, right, even if let's say you buy something, and on paper, the value of it goes down. You gotta remember this is a is a rental property, right? So maybe your net worth in you know, your, your personal finance, tracker, personal capital, whatever you use to track your, your net worth, maybe that takes a hit. But you got to remember, you're not selling the I mean, you may have to who knows what's gonna happen, but that's just on paper, right? If it's a rental property, that thing's still making money every month. So I like to look at these things as I'm on a long time horizon, do I think real estate in 20-30 years is going to be more valuable than it is now are rents going to be higher than they are now?

I believe so. That is why I continue to invest through up and down. And one important caveat, I want to just, you know, say for myself, is I've never invested through a major recession. I started personally in 2017. So I've personally only seen a bull market but I like to listen to people who have been there and done that and one of the big things they always talk about is just make sure conservatively financing that's the big one, right like right now you can't even really go and get a five to 10% loan like they were doing in 06, 03-06 right. So like you have to be 20 25% down but You know, if you're feeling a little uncertain, maybe you maybe go 25 30% that'll help you weather storm so much better. Right? It gives you more of a cushion. So, yeah, besides what Michael mentioned those additional points I'd say there, and it's so hard to have a crystal ball and say what's going to happen, right? Like, I remember in 2018 people were calling 2018 going to be a crash. And then the headlines change to 2019 is going to be a crash. And then 2020 is going to be so every year those headlines are just there and it's really hard for people to predict them but they make for very click baity headlines. And I guess somebody at some point will get to say, see I told you I was right

Michael:

I was right yeah.

Emil:

They just keep moving the goalposts it's not to say it's not gonna happen always happens. They'll see that cycles but I don't know I plan on investing through the ups and downs.

Michael:

Well, thanks so much for listening everybody. That was our show. I hope you enjoyed the AMA or the A ua please continue to send us questions that you have if you'd like to see answered on the podcast. Also, feel free to leave us a rating and review. We have a swag bag giveaway to a couple of folks that help us get to 100 reviews wherever they listen to your podcasts, Apple, Google or Spotify. So feel free to drop us a line there. Let us know how you liking the podcast. We'll catch you on the next one. Happy investing.

Emil:

Happy investing